WASHINGTON — Now that unemployment has topped 10 percent, some liberal-leaning economists see confirmation of their warnings that the $787 billion stimulus package President Obama signed into law last February was way too small. The economy needs a second big infusion, they say.

No, some conservative-leaning economists counter, we were right: The package has been wasteful, ineffectual and even harmful to the extent that it adds to the nation’s debt and crowds out private-sector borrowing.

These long-running arguments have flared now that the White House and Congressional leaders are talking about a new “jobs bill.” But with roughly a quarter of the stimulus money out the door after nine months, the accumulation of hard data and real-life experience has allowed more dispassionate analysts to reach a consensus that the stimulus package, messy as it is, is working.

The legislation, a variety of economists say, is helping an economy in free fall a year ago to grow again and shed fewer jobs than it otherwise would. Mr. Obama’s promise to “save or create” about 3.5 million jobs by the end of 2010 is roughly on track, though far more jobs are being saved than created, especially among states and cities using their money to avoid cutting teachers, police officers and other workers.

“It was worth doing — it’s made a difference,” said Nigel Gault, chief economist at IHS Global Insight, a financial forecasting and analysis group based in Lexington, Mass.

Mr. Gault added: “I don’t think it’s right to look at it by saying, ‘Well, the economy is still doing extremely badly, therefore the stimulus didn’t work.’ I’m afraid the answer is, yes, we did badly but we would have done even worse without the stimulus.”

In interviews, a broad range of economists said the White House and Congress were right to structure the package as a mix of tax cuts and spending, rather than just tax cuts as Republicans prefer or just spending as many Democrats do. And it is fortuitous, many say, that the money gets doled out over two years — longer for major construction — considering the probable length of the “jobless recovery” under way as wary employers hold off on new hiring.

But there are criticisms, mainly that the Obama team relied last winter on overly optimistic economic assumptions and oversold the job-creating benefits of the stimulus package.

Optimistic assumptions in turn contributed to producing a package that if anything is too small, analysts say. “The economy was weaker than we thought at the time, so maybe in retrospect we could have used a little bit more and little bit more front-loaded,” said Joel Prakken, chairman of Macroeconomic Advisers, another financial analysis group, in St. Louis.

While some conservatives remain as skeptical as ever that big increases in government spending give the economy a jolt that is worth the cost, Martin Feldstein, a conservative Harvard economist who served in the Reagan administration, said the problem with the package was that some of its tax cuts and spending programs were of a variety that did little to spur the economy.

“There should have been more direct federal spending that would have added to aggregate demand,” he said. “Temporary tax cuts and one-time transfers to seniors were largely saved and didn’t stimulate spending.”

Even the $787 billion price tag overstates the plan’s stimulus value given changes made in Congress, economists say. Nearly a tenth of the package, $70 billion, comes from a provision adjusting the alternative minimum tax so it does not hit middle-income taxpayers this year. That routine fix, which would do nothing to stimulate the economy, was added in part to seek Republican votes. But to keep the package’s overall cost down, provisions that would stimulate the economy — like aid to revenue-starved states and infrastructure projects — got less as a result.

Among Democrats in the White House and Congress, “there was a considerable amount of hand-wringing that it was too small, and I sympathized with that argument,” said Mark Zandi, chief economist of Moody’s Economy.com and an occasional adviser to lawmakers.

Even so, “the stimulus is doing what it was supposed to do — it is contributing to ending the recession,” he added, citing the economy’s third-quarter expansion by a 3.5 percent seasonally adjusted annual rate. “In my view, without the stimulus, G.D.P. would still be negative and unemployment would be firmly over 11 percent. And there are a little over 1.1 million more jobs out there as of October than would have been out there without the stimulus.”

Politically, however, the president is saddled with his original claim that, with the stimulus, the jobless rate would peak at 8.1 percent — a miscalculation that Republicans constantly recall. While the administration has said its economic assumptions were in line with private forecasts, most of which also underestimated the recession’s punch, it was more optimistic than most.

“That was a mistake,” said Jeffrey A. Frankel, a Harvard University economist and former Clinton administration official who is a member of the National Bureau of Economic Research panel that judges when recessions start and end. “I thought so at the time.”

Christina D. Romer, chairwoman of Mr. Obama’s Council of Economic Advisers, said attention to that too-rosy projection “prevents people from focusing on the positive impact of the fiscal stimulus. So of course I find that frustrating.”

Much federal infrastructure money has gone not to new job-creating projects but to finance existing plans, which otherwise would be unaffordable to states.

So the stimulus has not “supercharged” transportation construction as was hoped, said Charles Gallagher, an asphalt company owner, speaking for the American Road and Transportation Builders Association, but it has nonetheless been “a welcome Band-Aid” to offset state cuts.

“Many contractors across the nation have been able to sustain, if not add to, their work force,” he said.

That sort of impact is what makes federal aid to state governments rank high in economists’ reckoning of the stimulus value of various proposals. Every dollar of additional infrastructure spending means $1.57 in economic activity, according to Moody’s, and general aid to states carries a $1.41 “bang” for each federal buck.

Even more effective are increases for food stamps ($1.74) and unemployment checks ($1.61), because recipients quickly spend their benefits on goods and services.

By contrast, most temporary tax cuts cost more than the stimulus they provide, according to research by Moody’s. That is true of two tax breaks in the stimulus law that Congress, pressed by industry lobbyists, recently extended and sweetened — a tax credit for homebuyers (90 cents of stimulus for each dollar of tax subsidy) and extra deductions for businesses’ net operating losses (21 cents).

Economists said Republicans’ recent proposals to rescind unspent money would be a mistake.

James Glassman, a senior economist at JPMorgan Chase & Company, said: “If we could be absolutely convinced that the growth we’re getting is for reasons beyond the help the government is giving, then that would make sense. But the fact is we can’t be certain of that.”

November 23, 2009Payback TimeWave of Debt Payments Facing U.S. Government By EDMUND L. ANDREWS

WASHINGTON — The United States government is financing its more than trillion-dollar-a-year borrowing with i.o.u.’s on terms that seem too good to be true.

But that happy situation, aided by ultralow interest rates, may not last much longer.

Treasury officials now face a trifecta of headaches: a mountain of new debt, a balloon of short-term borrowings that come due in the months ahead, and interest rates that are sure to climb back to normal as soon as the Federal Reserve decides that the emergency has passed.

Even as Treasury officials are racing to lock in today’s low rates by exchanging short-term borrowings for long-term bonds, the government faces a payment shock similar to those that sent legions of overstretched homeowners into default on their mortgages.

With the national debt now topping $12 trillion, the White House estimates that the government’s tab for servicing the debt will exceed $700 billion a year in 2019, up from $202 billion this year, even if annual budget deficits shrink drastically. Other forecasters say the figure could be much higher.

It would be so simple to follow the playbook of the inflationary 1970s. Today's deflationary threat is more dangerous, however.

GOLD SET ANOTHER RECORD MONDAY while the Dow Jones Industrial Average gained 1% to a 13-month high, supposedly based on the cheery thought that the U.S. dollar would inevitably collapse to zero.

Investors faced a barrage of bearish articles about America's fiscal plight, from the front page of the New York Times warning about "Wave of Debt Payments Facing U.S. Government" to the Economist's cover story, "Dealing with America's Fiscal Hole" to the Financial Times posing the question, "Is Sovereign Debt the New Subprime?"

No wonder they wanted to flee the dollar. As Dennis Gartman observed in his Monday morning missive: "It is almost as if one can hear capital saying aloud, 'Let me outta here; get me some gold; or get me some euros, at least get me some blue-chip stocks. Get me anything, but get me out.'"

With the U.S. Dollar Index falling another 0.7%, to 75.10, gold continued its seemingly unstoppable advance to another peak. The active December futures contract on the Comex settled up $17.90, at $1,164.70 an ounce after trading at almost $1,175.

And as if to underscore the public's interest in the latest gold rush, the five most-read stories on Marketwatch.com were all about gold. (Marketwatch is owned by News Corp., which also is the publisher of Barrons.com.)

There's no disputing that America's budget mess poses a long-term threat to the dollar, more so than the Federal Reserve's low-interest-rate policies. That was pointed out here just last week ("A Foolish View of America's Debt, Nov. 18.)

So far, however, there seems no shortage of buyers for the U.S. government's debt, including Monday's record auction of $44 billion of two-year notes, which will be followed $42 billion of five-year notes Wednesday and $32 billion of seven-year notes.

That would contradict the notion of an imminent rerun of That 'Seventies Show, featuring soaring interest rates and inflation. That is, after all, what sent gold to its then-record of $850 in January 1980, the final year of that benighted decade. (And by the way, notwithstanding all the recently published assessments of this decade, it doesn't end until Dec. 31, 2010.)

Would that we could have that rerun? We'd all have the playbook on how to deal with those travails. Don't buy any Pintos, avoid polyester and burn disco records. Just buy gold, dump bonds, borrow and borrow and buy the biggest house you can afford. Maybe the last one didn't turn out so well.

Indeed, Albert Edwards, Societe Generale's global strategist, sees the risks running quite the opposite of the consensus, which has a global recovery on track with a steadily falling dollar. Instead, he looks for a double-dip back into recession leading to a surging greenback, with a collapse of "the China economic bubble" resulting in a double whammy for commodity prices.

Writing in his latest Global Strategy Letter, Edwards points to signs of doubts about the U.S. economic recovery, from the labor market remaining "very sick" with the uptick in unemployment rate over 10% plus the Conference Board's consumer finding showing jobs getting still harder to get. Meanwhile, the ECRI Leading Indicator, which trumpeted recovery earlier in the year, has fallen for five straight weeks.

But what's way out of the consensus is the call for China's massive trade surplus to turn to deficit by Societe Generale's Asian economist, Glenn Maguire, who Edwards writes has been "very right on China this year."

"This is a mega-call and will have major implications for the global financial markets," Edwards declares. China no longer will be accumulating currency reserves at nearly the same pace, leaving less to recycle into U.S. Treasuries. The reduced capital inflow would also slow China's domestic monetary growth and real output, which track each other. Meanwhile, capital outflows from Japan, another source of global liquidity, could be hampered were there a sharp rise in its government bond yields.

A synchronized end to the Chinese and U.S. economic recoveries could play out in increased protectionist pressures, including competitive devaluations, Edwards continues. That could lead to a spike in the dollar as speculative carry trades are unwound, as happened to the yen in 2008. A rise in the dollar would pull up the renminbi, which "may be all too much for a beleaguered Chinese economy."

Then, Edwards says, the U.S. goal of delinking of the RMB from the dollar would be accomplished -- with China devaluing rather than revaluing its currency higher.

Edwards adds, "I am reassured that my views are not totally bananas when two of the deepest thinkers are also concerned about a Chinese economic crash."

Those include Edward Chancellor, who has written extensively about bubbles, including "The Devil Take the Hindmost: A History of Financial Speculation," and recently observed the Chinese economy shows symptoms of weakness similar to those after the Greenspan Fed reflated following the bursting of the tech bubble. Meanwhile, Jim Chanos, the famed short seller of Kynikos Associates, thinks he spies manipulated data about China's economy. Chanos, it should be remembered, sniffed out the phony accounting at Enron.

Indeed, there were hints the bubble in China was about to burst, or at least deflated, in the 3.5% plunge in the Shanghai Composite Tuesday. That came after on rumors that China's banks were ordered to raise more capital. Charles Dumas of Lombard Street Research writes in a note to clients this wasn't just a matter of an increased supply of shares, but a move almost certainly on orders of the government for banks to bolster their balance sheets following their lending spree earlier this year. Tightening of monetary policy is likely to follow as the boom produced by massive fiscal stimulus -- equal to 25% of gross domestic product--is generating inflation pressures.

The sort of deflationary crisis, resulting in competitive devaluations, protectionism and contracting world trade, recalls what happened in the 1930s, Edwards concludes. Despite politicians' solemn vows not repeat those blunders, "all I see are more and more protectionist measures being implemented, belying the soothing rhetoric."

The 1930s were indeed very different from the 1970s. In the latter decade, you could just buy gold (though that was more difficult before today's exchange-traded funds) and let your cash earn double-digit yields. The falling dollar battered stocks and especially bonds back then.

Now, cash yields absolute zero but stocks benefit from every drop in the dollar while global investors continue to buy Treasuries, seemingly undeterred by the greenback's steady slide.

But recall a year ago; the dollar soared like the yen with the unwinding of carry trades (which involve the borrowing in those low-yielding currencies) as stocks and other risk assets fell sharply.

Such a rerun seems to be the one potential risk that seems ignored as gold gets bid giddily higher -- a significantly more painful deflationary squeeze than the inflationary surge they see.

At the minimum, China's likely moves to cool its boom could portend outcomes quite different from the what the consensus expects. As Lombard Street's Dumas concludes, "With China's recovery as the leading force in the world recovery, this would mark the end of the stock market, and general risk asset, rebound from last winter's lows."

Friday Feature /Only Supply Side Can Fix $1.4 Trillion Deficit~~~~~~~~~~~~RICH KARLGAARD, "Digital Rules" on Forbes.com (11/30/09): school ofeconomic public policy known as "supply side" is out of favor, but it isnot as dead as it looks. The theory works. The production of goods andservices does indeed create its own demand. Otherwise, low productivitycountries would be wealthy. Jamaica would be as rich as Singapore. As JoshLerner points out here: "In 1965 the two nations were equal in wealth.Four decades later, their standing was dramatically different. Whataccounts for the difference?"

Lerner answers his own question:

Soon after independence, Singapore aggressively invested in infrastructuresuch as its port, subsidized its system of education, maintained an openand corruption-free economy, and established sovereign wealth funds thatmade a wide variety of investments. It has also benefited from a strategicposition on the key sea lanes heading to and from East Asia. Jamaica,meanwhile, spent many years mired in political instability, particularlythe disastrous administration of Michael Manley during the 1970s. Dramaticshifts from a market economy to a socialist orientation and back again,with the attendant inflation, economic instability, crippling public debt,and violence, made the development and implementation of a consistentlong-run economic policy difficult.

But in explaining Singapore's economic growth, it is hard not to giveconsiderable credit to its policies toward entrepreneurship. Thegovernment has experimented with a wide variety of efforts to develop anentrepreneurial sector:

In other words, Singapore invested in supply. It built infrastructure withgovernment funds. It kept taxes low, regulations light, trade open andlaws simple but rigorously enforced so as to encourage private investment.

President Obama is a thorough-going demand-sider. The $787 billionstimulus package, tax "cuts" for people who aren't paying taxes, Cash forClunkers--could it be any clearer? Demand side has a fatal flaw. It takesthe production of goods and services for granted. Demand side takes you toJamaica, not Singapore.

The critics of supply side argue that it, too, has a fatal flaw: deficits.Does it? Sure, when government spends more than it takes in.

Supply side, in fact, is the only way out of the deficit nightmare....

LAKSHMI MITTAL, Britain’s richest man, stands to benefit from a £1 billion windfall from a European scheme to curb global warming. His company ArcelorMittal, the steel business where he is chairman and chief executive, will make the gain on “carbon credits” given to it under the European emissions trading scheme (ETS).

The scheme grants companies permits to emit CO2 up to a specified “cap”. Beyond this they must buy extra permits. An investigation has revealed that ArcelorMittal has been given far more carbon permits than it needs. It has the largest allocation of any organisation in Europe.

The investigation has also shown that ArcelorMittal and Eurofer, which represents European steel makers at European level, have lobbied intensively in Brussels. This has included threatening to move plants out of Europe at a cost of 90,000 jobs, and asking European commissioners to meet Mittal.

ArcelorMittal is now free to sell its surplus permits on the market or to hoard them for future use. The latter would allow it to avoid cutting greenhouse gas emissions for years, effectively undermining the point of the scheme.

Either way, the company will have gained assets worth around £1 billion by 2012. The eventual value could be much greater. Each carbon permit is currently worth about £12.70 but the European Union has said it wants to drive this price above £30.

The disclosure comes on the eve of the Copenhagen climate conference, whose main aim is to extend schemes such as the ETS into a global system for trading carbon.

Details emerged from an analysis of the community independent transaction log, the EU system for logging the carbon permits issued to factories and power stations covered by the scheme in Europe.

Anna Pearson, an expert on the ETS who carried out the analysis, said: “Between 2008 and 2012 ArcelorMittal stands to gain assets worth £1 billion at today’s prices for scant effort. For them, the ETS has been turned into a system for generating free subsidies.”

ArcelorMittal, which is based in Luxembourg and has more than 80 steel plants around Europe, has confirmed Pearson’s figures. The ETS covers 10,000 industrial installations, responsible for 40% of the EU’s greenhouse gas emissions.

“Following intense lobbying and claims that the scheme would harm business, the cap on emissions was set too high and too many permits were issued,” said Pearson, who performed her analysis for Sandbag, which campaigns to improve carbon trading.

ArcelorMittal was given the right to emit 90m tonnes of CO2 each year from its plants in the EU from 2008 to 2012. However, the company emitted just 68m tonnes last year. That was partly due to the recession, but Pearson believes its allocation of 90m was already too generous. This year ArcelorMittal’s emissions are predicted to plummet to 43m tonnes.

A spokesman for the company said: “The extra surplus arose when actual steel production fell way below forecasts because of the unexpected global economic crisis. As the world returns to growth, we expect to use them up.”

However, Pearson estimates that by 2012 the company will have accumulated surplus permits for 80m tonnes of CO2 — equivalent to the pollution generated annually by the whole of Denmark.

Details of ArcelorMittal’s lobbying emerged from freedom of information requests made by Corporate Observatory Europe to the European commission. They include two letters from Mittal himself, in December 2006 and April 2007, requesting meetings with Günter Verheugen, the commissioner for enterprise and industry, and Stavros Dimas, the environment commissioner.

In another, in January 2008, ArcelorMittal threatened to relocate if made to pay for carbon certificates.

The business is 43% owned by Mittal, who tops The Sunday Times Rich List with a fortune of £10.8 billion. He lives in a Kensington mansion bought for £70m in 2003.

The revelations support the criticisms of carbon trading by Professor Jim Hansen, director of Nasa’s Goddard Institute for Space Studies, who supports the alternative idea of a direct tax on carbon. He said: “The corporates see emissions trading as a huge opportunity to boost profits.”

Pearson said she had written to Mittal on behalf of Sandbag asking if ArcelorMittal would “retire” the carbon permits — meaning they could not be used by anyone else.

“If the company were to rip these up it would be a great act of philanthropy and set an excellent example,” she said.

An ArcelorMittal spokesman said: “ArcelorMittal’s surplus carbon credits are an asset which will only grow in importance,” he said.

"politicians are acting either in ignorance of specialist knowledge or by manipulating and misusing it in the conviction that central planners can organize and control human behavior better than individuals can through markets and voluntary action"

Stealing a thought from Michael Barone's column at the DC Examiner, 4 examples:

"Writing in Policy Review, economists Paul Gregory and Kate Zhou compare the success of market reforms in China and their failure in Russia. They point out that reform in China was bottom-up: Peasants started producing food for private sale and, as markets thrived, Communist leader Deng Xiaoping winked at their rule-breaking and changed the rules. The economy mostly thrived.

In contrast, reform in Russia was top-down: Mikhail Gorbachev changed the rules, but that allowed apparatchiks to gobble up state industries and created new monopolies, over which Vladimir Putin's government re-established control. The economy mostly stagnated.

The Democrats' health care and cap-and-trade bills are classic top-down legislation. Many inside players have bought into the changes and are preparing to game the new systems. Far from banishing lobbyists from Washington, Barack Obama has provided them with enormous amounts of new business.

Romer, who heads the White House Council of Economic Advisers, said: "no one is talking about raising taxes during a recession..."

She didn't say why not. I wish she would spell that out. Maybe she would say that raising tax rates reduces the incentives to take on economic risk, to hire, to invest, to make capital purchases, to make larger consumer purchases, etc, etc, etc. Everybody knows that (?).

We've been through this here before, but a very important economic point is that the promise of raising tax rates has the EXACT SAME AFFECT on stifling new investment. Or perhaps worse as investors sit out the uncertainty rather than respond to a new, worse set of rules.

Pelosi to the speakership, Obama into the senate majority in 2006 and obviously Obama to the White House... this group came to power on the promise of significantly raising key tax rates on Americans who hire and invest. They still hold the promise of doing that as soon as they see a little bit of life in the economy.

That promise, even yet largely unfulfilled, more than anything else IMO, killed off this economy.

Where I part with Keynes and these current demand siders is that I would not ever do in good economic times what everyone knows would be harmful in bad economic times.

Well, the curve itself measures Treasury interest rates, by maturity, from 91-day T-bills all the way out to 30-year bonds. It's the difference between the long rates and the short rates that tells a key story about the future of the economy.

When the curve is wide and upward sloping, as it is today, it tells us that the economic future is good. When the curve is upside down, or inverted, with short rates above long rates, it tells us that something is amiss -- such as a credit crunch and a recession.

The inverted curve is abnormal; the positive curve is normal. We have returned to normalcy, and then some. Right now, the difference between long and short Treasury rates is as wide as any time in history. With the Fed pumping in all that money and anchoring the short rate at zero, investors are now charging the Treasury a higher interest rate for buying its bonds. That's as it should be. The time preference of money simply means that the investor will hold Treasury bonds for a longer period of time, but he or she is going to charge a higher rate. That is a normal risk profile.

The yield curve may be the best single forecasting predictor there is. When it was inverted or flat for most of 2006, 2007 and the early part of 2008, it correctly predicted big trouble ahead. Right now, it is forecasting a much stronger economy in 2010 than most people think possible.

So there could be a mini boom next year, with real gross domestic product growing at 4 to 5 percent, perhaps with a 6 percent quarter in there someplace. And the unemployment rate is likely to come down, perhaps moving into the 8 percent zone from today's 10 percent.

The normalization of the Treasury curve is corroborated by the rising stock market and a normalization of credit spreads in the bond market. I note that as the curve has widened in recent weeks, gold prices have corrected lower and the dollar has increased somewhat. So the edge may be coming off the inflation threat.

If market investors expect the economy to grow, inflation at the margin will be that much lower as better growth absorbs at least some of the money-supply excess created by the Fed. My hunch is that inflation will range 2 percent to 3 percent next year.

It also could be that the health care bill about to pass in the Senate is less onerous from a growth standpoint -- and certainly less onerous than the House bill. For example, the Senate bill does not contain a 5.4 percent personal-tax-rate surcharge, which also would apply to capital gains. So if the Senate bill becomes the final bill, it will be less punitive on growth.

That could explain the fall in gold and the rise in the dollar. We'll still be stuck with a tax hike from the expiration of the Bush tax cuts, but at least we won't have a tax hike on top of that. That's the optimistic view, at any rate.

But really, pessimists have missed the big rise in corporate profits, the resiliency of our mostly free-market capitalist economy and the monetarist experiment from the easy-money Fed. The optimal policy mix on the supply-side is low tax rates and King Dollar. We don't have that. So as good as 2010 may be, with investors moving to beat the tax man, it could be a false prosperity at the expense of 2011.

But let's cross that bridge when we get there. Right now, rising stocks and a wide and positive yield curve are spelling strong economic growth in the new year.

Even though it is POTH, a point of major importance is finally noticed-- that low interest rates destroy savers. Because it is POTH, "capitalism" is blamed, but the true name is "liberal fascism". The destruction of savings due to government meddling (which includes programs which "protect" people from the natural responsibility to save for emergencies, old age, etc.) is one of the most profound underlying vehicles for the destruction of the American free market and one of the most profound enabling tactics for the implementation of liberal fascism. Now that govt. deficits look ready to kick it in with interest rates, POTH finally notices that savers are hurt.

==============================================At Tiny Rates, Saving Money Costs Investors RecommendBy STEPHANIE STROMPublished: December 25, 2009 Millions of Americans are paying a high price for a safe place to put their money: extremely low interest rates on savings accounts and certificates of deposit.

Joe Parks, a retired accountant in Houston who sits on the volunteer advisory board of Better Investing, said that with low interest rates and fees, retirees and the elderly could take anywhere from a half to three-quarters of a percent cut in their incomes. Joe Parks, a retired accountant, said retirees and the elderly would take up to a three-quarters of a percent cut in income. The elderly and others on fixed incomes have been especially hard hit. Many have seen returns on savings, C.D.’s and government bonds drop to niggling amounts recently, often costing them money once inflation, fees and taxes are considered.

“Open a Savings Plus Account today and get a great rate,” read an advertisement in the Dec. 16 Newsday for Citibank, which was then offering 1.2 percent for an account. (As low as it was, the offer was good only for accounts of $25,000 and up.)

“They’re advertising it in the papers as if they’re actually proud of that,” said Steven Weisman, a title insurance consultant in New York. “It’s a joke.”

The advertised rate for the Savings Plus account has expired, according to the bank’s Web site; as of Friday, the account paid an interest rate of 0.5 percent. The bank’s highest-yield savings account, the Ultimate, was paying 1.01 percent.

The best deal Mr. Weisman has found is 2 percent on a one-year certificate of deposit offered by ING Direct, an online bank that has become a bit of a darling among the fixed-income crowd.

Interest on one- and two-year Treasury notes was just 0.40 percent and 0.89 percent, as of Monday. Bank of America offers 0.35 percent on a standard money market account with $10,000 to $25,000, and Wells Fargo will pay 0.05 percent on a basic savings account.

Indeed, after fees are subtracted, inflation is accounted for and taxes are paid, many investors in C.D.’s, government bonds and savings and money market accounts are losing money. In fact, Northern Trust waived some $8 million in fees on money market accounts because they would have wiped out all interest, and then some.

“The unemployment situation and the general downturn in the economy had an impact, but what’s going to happen now as C.D.’s mature is that retirees and the elderly are going to take anywhere from a half to three-quarters of a percent cut in their incomes,” said Joe Parks, a retired accountant in Houston on the advisory board of Better Investing, an organization that works to help people become savvier investors. “It’s a real problem.”

Experts say risk-averse investors are effectively financing a second bailout of financial institutions, many of which have also raised fees and interest rates on credit cards.

“What the average citizen doesn’t explicitly understand is that a significant part of the government’s plan to repair the financial system and the economy is to pay savers nothing and allow damaged financial institutions to earn a nice, guaranteed spread,” said William H. Gross, co-chief investment officer of the Pacific Investment Management Company, or Pimco. “It’s capitalism, I guess, but it’s not to be applauded.”

Mr. Gross said he read his monthly portfolio statement twice because he could not believe that the line “Yield on cash” was 0.01 percent. At that rate, he said, it would take him 6,932 years to double his money.

Many think the Federal Reserve is fueling a stock market bubble by keeping rates so low that investors decide to bet on stocks instead. Mr. Parks of Better Investing moved more money into the stock market early this year, when C.D.’s he held began maturing and he could not nearly recover the income they had generated by rolling them over.

He began investing some of the money in blue chip stocks with a dividend yield of at least 3 percent and even managed to find an oil-and-gas limited partnership that offered 8 percent.

Mr. Parks said, however, that he would not pursue that strategy as more of his C.D.’s matured. “What worked in the first quarter of this year isn’t as relevant, because the market has come up so much,” he said.

No one is advising a venture into higher-risk investments. Katie Nixon, chief investment officer for the northeast region at Northern Trust, said that, in general, “no one should be taking risks with their pillow money.”

“What people are paying for is safety and security,” she said, “and that’s probably just right.”

People who rely on income from such investments for support, however, are being forced to consider new options.

Eileen Lurie, 75, is taking out a reverse mortgage to help offset the decline in returns on her investments tied to interest rates. Reverse mortgages have a checkered reputation, but Ms. Lurie said her bank was going out of its way to explain the product to her.

“These banks don’t want to be held responsible for thousands of seniors standing in bread lines,” she said.

Such mortgages allow people who are 62 and older to convert equity in their homes into cash tax-free and without any impact on Social Security or Medicare payments. The loans are repaid after death.

“If your assets aren’t appreciating and aren’t producing any income, you’re getting eaten up in this interest rate environment,” said Peter Strauss, a lawyer who advises the elderly. “A reverse mortgage is one way of making a very large asset produce income.”

Eve Wilmore, 93, has watched returns on her C.D.’s drop to between 1 percent and 2 percent from about 5 percent a year or so ago. Yet the Social Security Administration recently raised her Medicare Part B premium based on those higher rates she had been earning. “I’m being hit from both sides,” Mrs. Wilmore said. “There’s some way I can apply for a reconsideration, and I’m going to fight it. I have to.”

She said she was reluctant to redeploy her money into higher-risk investments. “I don’t know what my medical bills will be from here on in, and so I want to keep the money where I can get to it easily if I need it,” she said.

Peter Gomori, who taught a course on money and investing for Dorot, a nonprofit that offers services for the elderly, did not advise his students on investment strategies but said that if he had, he would probably have told them to sit tight.

“I know interest rates are very low for Treasury securities and bank products, but that isn’t going to be forever,” he said.

But investment professionals doubt rates will rise any time soon — or to any level close to those before the crash.

“What the futures market is telling me,” Mr. Gross said, “is that in April 2011, these savers that are currently earning nothing will be earning 1.25 percent.”

The Bankruptcy of the United States By Porter Stansberry From the November 23, 2009, S&A Digest

It's one of those numbers that's so unbelievable you have to actually think about it for a while... Within the next 12 months, the U.S. Treasury will have to refinance $2 trillion in short-term debt. And that's not counting any additional deficit spending, which is estimated to be around $1.5 trillion. Put the two numbers together. Then ask yourself, how in the world can the Treasury borrow $3.5 trillion in only one year? That's an amount equal to nearly 30% of our entire GDP. And we're the world's biggest economy. Where will the money come from?

How did we end up with so much short-term debt? Like most entities that have far too much debt – whether subprime borrowers, GM, Fannie, or GE – the U.S. Treasury has tried to minimize its interest burden by borrowing for short durations and then "rolling over" the loans when they come due. As they say on Wall Street, "a rolling debt collects no moss." What they mean is, as long as you can extend the debt, you have no problem.

Unfortunately, that leads folks to take on ever greater amounts of debt... at ever shorter durations... at ever lower interest rates. Sooner or later, the creditors wake up and ask themselves: What are the chances I will ever actually be repaid? And that's when the trouble starts. Interest rates go up dramatically. Funding costs soar. The party is over. Bankruptcy is next.

When governments go bankrupt it's called "a default." Currency speculators figured out how to accurately predict when a country would default. Two well-known economists – Alan Greenspan and Pablo Guidotti – published the secret formula in a 1999 academic paper. That's why the formula is called the Greenspan-Guidotti rule. The rule states: To avoid a default, countries should maintain hard currency reserves equal to at least 100% of their short-term foreign debt maturities.

The world's largest money management firm, PIMCO, explains the rule this way: "The minimum benchmark of reserves equal to at least 100% of short-term external debt is known as the Greenspan-Guidotti rule. Greenspan-Guidotti is perhaps the single concept of reserve adequacy that has the most adherents and empirical support."

The principle behind the rule is simple. If you can't pay off all of your foreign debts in the next 12 months, you're a terrible credit risk. Speculators are going to target your bonds and your currency, making it impossible to refinance your debts. A default is assured.

So how does America rank on the Greenspan-Guidotti scale? It's a guaranteed default. The U.S. holds gold, oil, and foreign currency in reserve. The U.S. has 8,133.5 metric tonnes of gold (it is the world's largest holder). That's 16,267,000 pounds. At current dollar values, it's worth around $300 billion. The U.S. strategic petroleum reserve shows a current total position of 725 million barrels. At current dollar prices, that's roughly $58 billion worth of oil. And according to the IMF, the U.S. has $136 billion in foreign currency reserves. So altogether... that's around $500 billion of reserves. Our short-term foreign debts are far bigger.

According to the U.S. Treasury, $2 trillion worth of debt will mature in the next 12 months. So looking only at short-term debt, we know the Treasury will have to finance at least $2 trillion worth of maturing debt in the next 12 months. That might not cause a crisis if we were still funding our national debt internally. But since 1985, we've been a net debtor to the world. Today, foreigners own 44% of all our debts, which means we owe foreign creditors at least $880 billion in the next 12 months – an amount far larger than our reserves.

Keep in mind, this only covers our existing debts. The Office of Management and Budget is predicting a $1.5 trillion budget deficit over the next year. That puts our total funding requirements on the order of $3.5 trillion over the next 12 months.

So... where will the money come from? Total domestic savings in the U.S. are only around $600 billion annually. Even if we all put every penny of our savings into U.S. Treasury debt, we're still going to come up nearly $3 trillion short. That's an annual funding requirement equal to roughly 40% of GDP. Where is the money going to come from? From our foreign creditors? Not according to Greenspan-Guidotti. And not according to the Indian or Russian central banks, which have stopped buying Treasury bills and begun to buy enormous amounts of gold. The Indians bought 200 metric tonnes this month. Sources in Russia say the central bank there will double its gold reserves.

So where will the money come from? The printing press. The Federal Reserve has already monetized nearly $2 trillion worth of Treasury debt and mortgage debt. This weakens the value of the dollar and devalues our existing Treasury bonds. Sooner or later, our creditors will face a stark choice: Hold our bonds and continue to see the value diminish slowly, or try to escape to gold and see the value of their U.S. bonds plummet.

One thing they're not going to do is buy more of our debt. Which central banks will abandon the dollar next? Brazil, Korea, and Chile. These are the three largest central banks that own the least amount of gold. None own even 1% of their total reserves in gold.

The Porter Stansberry piece is very interesting. I don't take the US bankruptcy worry very seriously because we already are in a sense. Question IMO is just how much more damage.

Clinton saved billions with a very high risk by financing with short term debt. The risk really at what cost will be the replacement debt.

The U.S. Treasury does not risk not being able to find buyers for bonds. We currently use the Bernie Madoff technique on steroids. We just print (monetize) as they come due and sell replacement bonds as we see fit. If they sell - they sell. If not - then it stays monetized. Like issuing more stock instead of borrowing. The current owners shares just get a few trillion more diluted. We can't default in our own currency under our own rules. It is all play money in a sense from the point of view of the policy makers.

For the zillionth time, I ask the question, what right does a congress today have to obligate a congress of tomorrow? It violates the principle of consent of the governed. Tomorrow's voter is boxed in without choices. What if in the future they want a lower tax, lower spending society or different programs from the flawed ones of today? The establishment of these long term entrenched programs takes choices away from future voters and that is WRONG IMHO.

Ran across the piece below at the American Thinker over the holidays. I have warned others that if/when the economy comes back we will see inflation and high interests rates because we have already 'inflated' the currency with 'printed money' and price increases are a result or symptom of the already inflated currency.

One flaw and one omission to that line of reasoning. The omission is in the if/when the economy roars back. Under today's policies, why would it? The reported 3rd qtr growth was adjusted down and looks to be government sector only. If you hire, earn or save, you are screwed.

The flaw in inflationary thinking is that while we are 'printing' or injecting a couple trillion a year in the U.S. we have also destroyed 50 trillion of wealth wordwide. For every bank loan dismantled and asset de-leveraged, there is a shrinking of money besides the loss in value.

Look at the Fed. Looks like everything they are doing is inflationary with 0% interest etc. Maybe with all the info they have they think the strongest need is still fighting off deflation. At roughly zero interest, they don't have room to go any further.

We had this discussion before I believe and it is important to understand that deflation is not the opposite of inflation. It is just another ailment like strep vs. viral infection or heart attack vs. stroke. They are both the opposite a vibrant, healthy economy with a stable currency and positive public policies guiding it like reasonable incentives to produce, save, invest, hire, etc.

December 22, 2009The Deflation ThreatBy Paul BerkowitzContrary to what you are hearing in the media, the worst economic news may still lie ahead: A deflationary depression is descending upon us.

Breakneck federal printing of debt and dollars, gold and stocks rising, the dollar falling -- surely these trends presage inflation, or even hyperinflation. So goes the narrative across the media. But a contrarian and increasingly likely view is that deflation, not inflation, awaits.* What is deflation? How will it develop? How will it affect us?

Most of us have known only inflation, in which prices rise over time. In deflation, prices fall. The last time this happened in the U.S. was during the Great Depression. Japan has been living it these last fifteen years.

A falling price trend is at first a benefit to consumers. But then it leads to a spiral of economic decline: a depression. Deflation occurs when money for whatever reason becomes scarce, and therefore more valuable. Lower prices are the effect. Producers starve for profits, which leads to layoffs, loan defaults, and bankruptcies. Borrowers find they have to repay with more expensive dollars, so they pay off their debts. Low debt throttles growth and slows purchases. Expensive dollars make exports less competitive. Unsold inventories waste away on the shelf, crumble in value, and must be sold at deep discounts. Prices fall further, and so on, in a vicious circle.

Normal downturns are triggered by cyclic imbalances in which supply temporarily exceeds demand. Growth pauses while inventory excesses are liquidated. This time, however, things are different. The triggering event was an asset valuation bubble -- high stock and real estate prices -- boosted excessively in a buying mania fueled by cheap credit during the last fifteen years. Lots of borrowing creates financial leverage, which pumps up profits during good times and wipes them out during bad. Consumer credit swelled with the aid of cheap mortgages and home equity lines. Businesses borrowed cheap short-term money and invested long-term, expecting to roll the loans over as profits expanded. Most significantly, bankers ran high ratios of what they lent out versus what they took in. All of this borrowing was encouraged by the Federal Reserve Board and Congress to foster social goals like full employment and high levels of homeownership.

But the system eventually became unstable. The real estate that served as collateral for trillions of dollars of debt on the banks' (and the bank-like Fannie and Freddie) balance sheets became priced too high, and for the first time in seventy years, prices began a serious decline. Many highly leveraged borrowers had their equity wiped out, so they threatened to default. An increased sense of risk rippled through these debt pools, erasing much of their value and rendering them unsalable, or "toxic." Soon, a "run," or loss of general confidence, pervaded the U.S. and European economies. Though it has come to be called the housing bubble recession, a better name is the great credit bubble depression.

Deflation stems from a shortage of money. Isn't the Fed creating trillions of new dollars that they lend to banks and to the Treasury for disbursement in "stimulus" programs? Yes, but even as the Fed has recently created $2 trillion in new assets, many times, more money has been and will continue to be taken out of the world's economy through the process of de-leveraging -- that is, the paying off or writing off of a portion of the hundreds of trillions in credit floated around the world. Despite talk of TARP success and nascent recovery, those toxic assets are still on the books, some with the banks and some with the Fed itself. Eventually, much of this money will become worthless. As fast as the Fed is printing new money, money is being destroyed as debt is taken off the table. In the end, the Fed will lose as the quicksand of depression sucks more and more money into its muck.

Ironically, the 60% stock market rally of 2009, which in itself is anti-deflationary, is no source of comfort. Though it's hard to prove why stocks move, the recent rally is most likely due to a "carry trade," in which banks borrow cheaply from the Fed and invest in high-return risk markets like stock, gold, or even foreign currencies. The Fed is encouraging this with low rates precisely because this asset re-inflation makes the dollar less valuable. They are fighting the inevitable deflation.

But they are also creating a new asset bubble just like the one that imploded last year. They have lowered short-term interest to zero. As prices correct downward and the dollar rises as deleveraging continues, the Fed can take rates no lower. The last remedy available is for the Fed to buy government and corporate debt in the open market, literally printing money at will -- adrenaline for a burst, perhaps, but not sustainable. Other government measures like deficit spending and expansion of primarily public sector jobs in the "Stimulus" program are simply wasteful, destroying more dollars in the present and creating public debt to burden the future. These effects are deflationary. Obama's plans for new taxes and regulations, which extinguish dollars, are also deflationary.

What about the oft-cited signs of recovery like upticks in GDP, consumer sentiment, and retail sales? Well, even in a trending economy -- and ours is trending down -- it is normal to see short blips, zigs, and zags against the trend. The numbers are also somewhat cooked for political effect. You'll know that the grip of deflation is tightening if you continue to see more of the following: discounts, price reductions, joblessness, real estate vacancies, bank failures, business failures, public finance failures, pension defaults, loan defaults, shrinking debt and credit, higher savings ratios, and frugal spending.

Obama's economists, Larry Summers and Ben Bernanke, are smart enough to understand and see the lurking deflation, even if they publicly brag that the worst is over. They might even quietly suspect that their current policy mix will not stop deflation. So what have they told the boss? If they are speaking honestly, then Obama must already know how much pain is coming our way. Or are these generals cowering before their stern commander, who will shoot a messenger bringing unwelcome news? The mood must be pretty tense.

*While the forecast is deflation for the next few years, inflation is still a long-term threat. Economic trends swing to and fro. A mild deflation could be followed by a mild inflation. Unfortunately, we may see a very deep deflation change into a hyperinflation as panicky anti-deflationary policies overshoot their mark.

Here’s what’s coming in economic news: The next employment report could show the economy adding jobs for the first time in two years. The next G.D.P. report is likely to show solid growth in late 2009. There will be lots of bullish commentary — and the calls we’re already hearing for an end to stimulus, for reversing the steps the government and the Federal Reserve took to prop up the economy, will grow even louder.

But if those calls are heeded, we’ll be repeating the great mistake of 1937, when the Fed and the Roosevelt administration decided that the Great Depression was over, that it was time for the economy to throw away its crutches. Spending was cut back, monetary policy was tightened — and the economy promptly plunged back into the depths.

This shouldn’t be happening. Both Ben Bernanke, the Fed chairman, and Christina Romer, who heads President Obama’s Council of Economic Advisers, are scholars of the Great Depression. Ms. Romer has warned explicitly against re-enacting the events of 1937. But those who remember the past sometimes repeat it anyway.

As you read the economic news, it will be important to remember, first of all, that blips — occasional good numbers, signifying nothing — are common even when the economy is, in fact, mired in a prolonged slump. In early 2002, for example, initial reports showed the economy growing at a 5.8 percent annual rate. But the unemployment rate kept rising for another year.

And in early 1996 preliminary reports showed the Japanese economy growing at an annual rate of more than 12 percent, leading to triumphant proclamations that “the economy has finally entered a phase of self-propelled recovery.” In fact, Japan was only halfway through its lost decade.

Such blips are often, in part, statistical illusions. But even more important, they’re usually caused by an “inventory bounce.” When the economy slumps, companies typically find themselves with large stocks of unsold goods. To work off their excess inventories, they slash production; once the excess has been disposed of, they raise production again, which shows up as a burst of growth in G.D.P. Unfortunately, growth caused by an inventory bounce is a one-shot affair unless underlying sources of demand, such as consumer spending and long-term investment, pick up.

Which brings us to the still grim fundamentals of the economic situation.

During the good years of the last decade, such as they were, growth was driven by a housing boom and a consumer spending surge. Neither is coming back. There can’t be a new housing boom while the nation is still strewn with vacant houses and apartments left behind by the previous boom, and consumers — who are $11 trillion poorer than they were before the housing bust — are in no position to return to the buy-now-save-never habits of yore.

What’s left? A boom in business investment would be really helpful right now. But it’s hard to see where such a boom would come from: industry is awash in excess capacity, and commercial rents are plunging in the face of a huge oversupply of office space.

Can exports come to the rescue? For a while, a falling U.S. trade deficit helped cushion the economic slump. But the deficit is widening again, in part because China and other surplus countries are refusing to let their currencies adjust.

So the odds are that any good economic news you hear in the near future will be a blip, not an indication that we’re on our way to sustained recovery. But will policy makers misinterpret the news and repeat the mistakes of 1937? Actually, they already are.

The Obama fiscal stimulus plan is expected to have its peak effect on G.D.P. and jobs around the middle of this year, then start fading out. That’s far too early: why withdraw support in the face of continuing mass unemployment? Congress should have enacted a second round of stimulus months ago, when it became clear that the slump was going to be deeper and longer than originally expected. But nothing was done — and the illusory good numbers we’re about to see will probably head off any further possibility of action.

Meanwhile, all the talk at the Fed is about the need for an “exit strategy” from its efforts to support the economy. One of those efforts, purchases of long-term U.S. government debt, has already come to an end. It’s widely expected that another, purchases of mortgage-backed securities, will end in a few months. This amounts to a monetary tightening, even if the Fed doesn’t raise interest rates directly — and there’s a lot of pressure on Mr. Bernanke to do that too.

Will the Fed realize, before it’s too late, that the job of fighting the slump isn’t finished? Will Congress do the same? If they don’t, 2010 will be a year that began in false economic hope and ended in grief.

Deregulation NowRichard A. Epstein, 01.05.10, 12:01 AM ETAs we enter a new decade, the political mood of the country can be captured in one word: glum. In particular, there is widespread recognition at the state level that conditions have reached near crisis proportions. In states like California, Illinois and New York, large deficits and service cutbacks loom everywhere, as traditional tax bases can no longer support the ambitious entitlement programs that rest precariously upon them. Tax revenues are down 10% across all states, even as taxes are raised in half of them.

The consequences are serious. Just look at the implosion in higher education now taking place at the University of California. State revenues have gone dry and budgets are slashed, yet student and labor protests make it difficult to raise tuition and fees needed to maintain a strong institutional base. More and more students cannot complete their education in four years, as unpaid furloughs will drive the best professors, administrators and students elsewhere.

Tragically, this lesson often goes unheeded. Too many faculty and students link arms with union organizers in the naïve hope of extracting blood from a stone. A bankrupt state cannot increase allocations to the university. But affluent citizens pack their bags to move to low-tax jurisdictions. And those who stay do more tax-free work at home or participate more heavily in the underground economy.

At this point, it won't work to reaffirm the deadly triumvirate that drives this misery: tax the rich, greater local control over real estate development and special privileges for organized labor. What's needed is to break from the past with some unimaginative, but necessary, New Year's resolutions in the areas of taxation, real estate and labor.

On taxation, don't play the mug's game of imposing ever higher marginal tax rates on ever lower amounts of income. Play it smart for the long haul. Low-income tax rates (and no estate taxes) will attract into states and communities energetic individuals who would otherwise choose to live and work elsewhere. Treasure their efforts to grow the overall pie. Don't resent their great wealth, but remember the benefits their successes generate for their employees, customers and suppliers. Repudiate the politics of envy for the social destruction it creates. Don't fret about the states and communities left behind. Let them adopt the same sound policies to keep people at home. The outcome won't be a zero-sum game. Enterprise is infectious. Open markets are the rising tide that raises all ships. High taxation is the tsunami that sinks them.

On real estate, change the culture so that getting permits for yourself and blocking them for everyone else is no longer the preeminent developer's skill. The government can still prevent buildings from falling down and fund infrastructure through general taxation. But don't let entrenched landowners and businesses raise NIMBY politics to a fine art. Today our dysfunctional land-use processes too often build thousands of dollars and years of delay into the price of every square foot of new construction. The instructive requirements on aesthetics and handicap access should be junked, along with the crazy-quilt system of real estate exactions that asks new developments to fund improvements whose benefit largely belongs to incumbent landowners. And for heaven's sake, learn the lesson of Kelo and stop using the state's power of condemnation for the benefit or private developers.

On labor, state and local governments have to junk the progressive mindset in both the public and the private sector. State and local governments should never, repeat never, be forced to negotiate with local unions. The huge pensions garnered by prison guards in California or transportation workers in New York present the intolerable spectacle of requiring ordinary citizens to pay huge subsidies to union workers far richer than themselves. On the private side, don't force developers to hire union workers on construction sites or to block the construction of new facilities that hire nonunion labor. If unions are really efficient--and they aren't--let them compete like everyone else.

On other labor fronts, we should kill off minimum wage laws that reduce opportunities for youthful employees and overtime legislation that distorts labor markets. And yes, take on the sacred cow by repealing the antidiscrimination laws on race and sex, and especially age.

None of this activity costs the public a dime. All of it will increase tax revenues and reduce administrative expenses. The best test of a good policy is whether it is sustainable over the long haul. We know now that the progressive regime flunks this key test. At this point, all good libertarians can only take cold comfort that they have fought these destructive policies tooth and nail. In today's overheated environment, our New Year's resolution can be summed up in two words: deregulation now.

Richard A. Epstein is the James Parker Hall Distinguished Service Professor of Law, The University of Chicago; the Peter and Kirsten Bedford Senior Fellow, the Hoover Institution; and a visiting professor at New York University Law School. He writes a weekly column for Forbes.com.

U.S. Job Losses in December Dim Hopes for Quick Upswing By PETER S. GOODMANPublished: January 8, 2010 The nation lost 85,000 jobs from the economy in December, the Labor Department reported Friday, as hopes for a vigorous recovery ran headlong into the prospect that paychecks could remain painfully scarce into next year.

“We’re still losing jobs,” said Dean Baker, co-director of the Center for Economic and Policy Research in Washington. “It’s nothing like we had in the free fall of last winter, but we’re not about to turn around. We’re still looking at a really weak economy.”The disappointing snapshot of the job market intensified pressure on the Obama administration to show results for the $787 billion spending bill it championed last year to stimulate the economy.

At a news conference, Mr. Obama acknowledged the December data as a setback, while outlining plans to deliver $2.3 billion in tax credits to spur manufacturing jobs in clean energy.

“We have to continue to explore every avenue to accelerate the return to hiring,” the president told reporters.

Most economists assume the unemployment rate — which held steady at 10 percent in December — will worsen in coming months. The nation would then confront the highest jobless rate in a generation on the eve of November elections that will determine the balance of power in Congress.

Mark Zandi, chief economist at Moody’s Economy.com, forecasts that the unemployment rate will reach 10.8 percent by October. The so-called underemployment rate — which counts people who have given up looking for work and those who are working part time for lack of full-time positions — now sits at 17.3 percent.

Mr. Zandi argues that the economy requires an additional $125 billion jolt of stimulus spending on construction projects and aid to state and local governments — a proposal that confronts enormous political challenges.

Republicans assert the first dose of stimulus spending has been squandered on dubious projects. The Obama administration, increasingly concerned by the size of federal deficits, is loath to spend more.

Mr. Zandi argues that a failure to spend now to spur growth could leave the United States in a bigger hole.

“If we don’t do it and we slide back into recession,” he said, “that’s going to exacerbate the deficit even more.”

The December jobs report included one encouraging milestone: Data for November was revised to show the economy gained 4,000 jobs that month, compared with initial reports showing a net loss of 11,000 jobs. That was the first monthly improvement since the recession began two years ago.

But the December data failed to repeat the trend, disappointing economists, who had generally expected a decline of 10,000 jobs. The report showed continued slowing in the pace of job losses, but it also underscored that companies were reluctant to hire.

For a fifth consecutive month, temporary help services expanded, adding 47,000 positions in December. That buttressed the notion that companies required more labor, even as they held off hiring full-time workers.

“We’re going in the right direction,” said Michael T. Darda, chief economist at MKM Partners, a research and trading firm. “If we just have a little bit of patience, we’ll start to see monthly increases of 200,000 to 300,000 jobs within six months.”

But millions of people still grappling with the bite of the worst downturn since the Great Depression have exhausted their patience — along with their savings and confidence.

In Charlotte, N.C., Kumar G. Navile, 33, says he has applied for 500 jobs in the year since he lost his position as an engineer.

“You get up every day and say today will be different, but it is mentally challenging,” Mr. Navile said. “I performed well in school. I got a job the day I graduated. It’s been a struggle.”

For those out of work, the market is bleaker than ever. The average duration of unemployment reached 29 weeks in December, the longest since the government began tracking such data in 1948.

“There is almost no hiring going on outside the temporary help sector,” said Andrew Stettner, deputy director of the National Employment Law Project.

Despite the parsing of data and contrasting economic forecasts, no complexity cloaked the basic facts of the report: job openings remain scarce.

“Most people, they’re not looking at the data,” Mr. Baker said. “They’re just asking, ‘Can I get a job?’ And that’s not getting any easier.”

The government’s monthly jobs report, while always important, now stands as the crucial indicator of economic health.

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For years, households spent in excess of incomes by borrowing against the value of homes, leaning on credit cards and tapping stock portfolios. But home prices have plummeted, stock holdings have diminished and nervous banks have sliced credit even for healthy borrowers, leaving the paycheck as the primary source of household finance.

Economists are divided over the nation’s economic prospects. Some argue that recent expansion on the factory floor presages broader economic improvement that will soon deliver job growth.

Skeptics argue that the factory expansion merely reflects a rebuilding of inventories after businesses slashed stocks during the panic. Expansion has been aided by stimulus spending and tax credits for homebuyers.

Those with the gloomiest outlooks envision a “double dip” recession, in which the economy resumes contracting. Others fear years of stagnation, like Japan’s Lost Decade in the 1990s.

One point of agreement among economists is that the nation cannot recover without millions of new jobs. The economy needs about 100,000 new jobs a month just to keep pace with people entering the work force. When workers gain wages, they spend them at other businesses, creating jobs for other workers — a virtuous cycle, in the parlance of economists.

Recent months have produced tentative signs that such a cycle might be unfolding, even as economists debate its sustainability. The December jobs report added to the ambiguity.

On the one hand, job losses undermined hopes for a quick turnaround. Yet the losses were a far cry from the roughly 700,000 monthly job losses seen a year ago.

“Standing still feels good when you’ve been used to falling backwards,” said Stuart G. Hoffman, chief economist at the PNC Financial Services Group. “But we want to move forward.”

About a year ago I tried to answer the deception of Robert Reich regarding income distribution. I was pleased to see that Dr. Sowell reads this forum and took the time to expand on this in his latest book.

Dr. Sowell is a Professor at Stanford, grew up in Harlem. During his 20s, when he was a self-described Marxist, he graduated magna cum laude from Harvard with a B.A. in economics. He also has a master's in economics from Columbia and a Ph.D. in economics from the University of Chicago.

Read just this one section and see the lies exposed of people like Paul Krugman, Reich and the politicians like Pelosi and Obama who base their shallow, class warfare politics on the lies of the liberal economists with their simple sleight of hand.

Simply put, the lowest income workers become richer and leave the lower quintiles. New workers enter the work force, some previously had no income, some came from far away to double their income though still low by our standards and they make up the new lowest quintile. Middle income earners become wealthier and enter the higher quintiles. The highest income earners and business owners retire, sell, die, scale back, whatever and the new high earners make even more than the rich of old used to make. Then some liberal economist perform a phony quintile analysis to conclude that no one has improved their economic standing over an extended period of time. All the liberal blogs and politicians pick up on it and take down our economy based on false information and analysis.--------------

How Data On Income Distribution Are Misunderstood And Misapplied

Most intellectuals outside the field of economics show remarkably little interest in learning even the basic fundamentals of economics. Yet they do not hesitate to make sweeping pronouncements about the economy in general, businesses in particular, and the many issues revolving around what is called "income distribution."

Famed novelist John Steinbeck, for example, commented on the many American fortunes which have been donated to philanthropic causes by saying:

One has only to remember some of the wolfish financiers who spent two thirds of their lives clawing a fortune out of the guts of society and the latter third pushing it back.

Despite the verbal virtuosity involved in creating a vivid vision of profits as having been clawed out of the guts of society, neither Steinbeck nor most other intellectuals have bothered to demonstrate how society has been made poorer by the activities of Carnegie, Ford or Rockefeller, for example — all three of whom (and many others) made fortunes by reducing the prices of their products below the prices of competing products.

Lower prices made these products affordable to more people, simultaneously increasing those people's standard of living and creating fortunes for sellers who greatly expanded the numbers of their customers. In short, this was a process in which wealth was created, not a process by which some could get rich only by making others poorer.

Nevertheless, negative images of market processes have been evoked with such phrases as "robber barons" and "economic royalists" — without answering such obvious questions as "Just who did the robber barons rob when they lowered their prices?" or "How is earning money, often starting from modest circumstances (or even poverty-stricken circumstances in the case of J.C. Penney and F.W. Woolworth) the same as simply inheriting wealth and power like royalty?"

The issue here is not the adequacy or inadequacy of intellectuals' answers to such questions because, in most cases, such questions are not even asked, much less answered. The vision, in effect, serves as a substitute for both facts and questions.

This is not to suggest that nobody in business ever did anything wrong. Saints have been no more common in corporate suites than in government offices or on ivy-covered campuses. However, the question here is not one of individual culpability for particular misdeeds.

The question raised by critics of business and its defenders alike has been about the merits or demerits of alternative institutional processes for serving the economic interests of society at large.

Implicit in many criticisms of market processes by intellectuals is the assumption that these are zero-sum processes, in which what is gained by some is lost by others. Seldom is this assumption spelled out but, without it, much of what is spelled out would have no basis.

Perhaps the biggest economic issue, or the one addressed most often, is that of what is called "income distribution," though the phrase itself is misleading, and the conclusions about income reached by most of the intelligentsia are still more misleading.

Variations in income can be viewed empirically, on the one hand, or in terms of moral judgments, on the other. Most of the contemporary intelligentsia do both. But, in order to assess the validity of the conclusions they reach, it is advisable to assess the empirical issues and the moral issues separately, rather than attempt to go back and forth between the two, with any expectation of rational coherence.

Given the vast amounts of statistical data on income available from the Census Bureau, the Internal Revenue Service and innumerable research institutes and projects, one might imagine that the bare facts about variations in income would be fairly well known by informed people, even though they might have differing opinions as to the desirability of those particular variations.

In reality, however, the most fundamental facts are in dispute, and variations in what are claimed to be facts seem to be at least as great as variations in incomes. Both the magnitude of income variations and the trends in these variations over time are seen in radically different terms by those with different visions as regards the current reality, even aside from what different people may regard as desirable for the future.

Perhaps the most fertile source of misunderstandings about incomes has been the widespread practice of confusing statistical categories with flesh-and-blood human beings.

Many statements have been made in the media and in academia, claiming that the rich are gaining not only larger incomes but a growing share of all incomes, widening the income gap between people at the top and those at the bottom. Almost invariably these statements are based on confusing what has been happening over time in statistical categories with what has been happening over time with actual flesh-and-blood people.

A New York Times editorial, for example, declared that "the gap between rich and poor has widened in America." Similar conclusions appeared in a 2007 Newsweek article that referred to this era as "a time when the gap is growing between the rich and the poor — and the super-rich and the merely rich," a theme common in such other well-known media outlets as the Washington Post and innumerable television programs.

"The rich have seen far greater income gains than have the poor," according to Washington Post columnist Eugene Robinson. A writer in the Los Angeles Times likewise declared, "the gap between rich and poor is growing."

According to Professor Andrew Hacker in his book "Money": "While all segments of the population enjoyed an increase in income, the top fifth did 24 times better than the bottom fifth. And measured by their shares of the aggregate, not just the bottom fifth but the three above it all ended up losing ground."

Although such discussions have been phrased in terms of people, the actual empirical evidence cited has been about what has been happening over time to statistical categories — and that turns out to be the direct opposite of what has happened over time to flesh-and-blood human beings, most of whom move from one category to another over time.

In terms of statistical categories, it is indeed true that both the amount of income and the proportion of all income received by those in the top 20% bracket have risen over the years, widening the gap between the top and bottom quintiles.

But Internal Revenue Service data following specific individuals over time show that, in terms of people, the incomes of those particular taxpayers who were in the bottom 20% in income in 1996 rose 91% by 2005, while the incomes of those particular taxpayers who were in the top 20% in 1996 rose by only 10% by 2005 — and those in the top 5% and top 1% actually declined.

While it might seem as if both these radically different sets of statistics cannot be true at the same time, what makes them mutually compatible is that flesh-and-blood human beings move from one statistical category to another over time.

When those taxpayers who were initially in the lowest income bracket had their incomes nearly double in a decade, that moved many of them up and out of the bottom quintile — and when those in the top 1% had their incomes cut by about one-fourth, that may well have dropped them out of the top 1%.

Internal Revenue Service data can follow particular individuals over time from their tax returns, which have individual Social Security numbers as identification, while data from the Census Bureau and most other sources follow what happens to statistical categories over time, even though it is not the same individuals in the same categories over the years.

In April 2008, The Orange County Register published a bombshell of an investigation about a license plate program for California government workers and their families. Drivers of nearly 1 million cars and light trucks—out of a total 22 million vehicles registered statewide—were protected by a “shield” in the state records system between their license plate numbers and their home addresses. There were, the newspaper found, great practical benefits to this secrecy.

“Vehicles with protected license plates can run through dozens of intersections controlled by red light cameras with impunity,” the Register’s Jennifer Muir reported. “Parking citations issued to vehicles with protected plates are often dismissed because the process necessary to pierce the shield is too cumbersome. Some patrol officers let drivers with protected plates off with a warning because the plates signal that drivers are ‘one of their own’ or related to someone who is.”

The plate program started in 1978 with the seemingly unobjectionable purpose of protecting the personal addresses of officials who deal directly with criminals. Police argued that the bad guys could call the Department of Motor Vehicles (DMV), get addresses for officers, and use the information to harm them or their family members. There was no rash of such incidents, only the possibility that they could take place.

So police and their families were granted confidentiality. Then the program expanded from one set of government workers to another. Eventually parole officers, retired parking enforcers, DMV desk clerks, county supervisors, social workers, and other categories of employees from 1,800 state agencies were given the special protections too. Meanwhile, the original intent of the shield had become obsolete: The DMV long ago abandoned the practice of giving out personal information about any driver. What was left was not a protection but a perk.

Yes, rank has its privileges, and it’s clear that government workers have a rank above the rest of us. Ordinarily, if one out of every 22 California drivers had a license to drive any way he chose, there would be demands for more police power to protect Californians from the potential carnage. But until the newspaper series, law enforcement officials and legislators had remained mum. The reason, of course, is that the scofflaws are law enforcement officials and legislators.

Here is how brazen they’ve become: A few days after the newspaper investigation caused a buzz in Sacramento, lawmakers voted to expand the driver record protections to even more government employees. An Assembly committee, on a bipartisan 13-to-0 vote, agreed to extend the program to veterinarians, firefighters, and code officers. “I don’t want to say no to the firefighters and veterinarians that are doing these things that need to be protected,” Assemblyman Mike Duvall (R-Yorba Linda) explained.

Exempting themselves from traffic laws in the name of a threat that no longer exists is bad enough, but what government workers do to the rest of us on a daily basis makes ticket dodging look like child’s play. Often under veils of illegal secrecy, public-sector unions and their political allies are systematically looting the public treasury with gold-plated pensions, jeopardizing the finances of state and local governments around the country, removing themselves from legal accountability, and doing it all in the name of humble working men and women just looking for their fair share. Government employees have turned themselves into a coddled class that lives better than its private-sector counterpart, and with more impunity. The public’s servants have become our masters.

Good Enough for Government Work

There was a time when government work offered lower salaries than comparable jobs in the private sector but more security and somewhat better benefits. These days, government workers fare better than private-sector workers in almost every area—pay, benefits, time off, and job security. And not just in California.

According to a 2007 analysis of data from the U.S. Bureau of Labor Statistics by the Asbury Park Press, “the average federal worker made $59,864 in 2005, compared with the average salary of $40,505 in the private sector.” Across comparable jobs, the federal government paid higher salaries than the private sector three times out of four, the paper found. As Heritage Foundation legal analyst James Sherk explained to the Press, “The government doesn’t have to worry about going bankrupt, and there isn’t much competition.”

In February 2008, before the recession made the disparity much worse, The New York Times reported that “George W. Bush is in line to be the first president since World War II to preside over an economy in which federal government employment rose more rapidly than employment in the private sector.” The Obama administration has extended the hiring binge, with executive branch employment (excluding the Postal Service and the Defense Department) slated to grow by 2 percent in 2010—and more than 15 percent if you count temporary Census workers.

The average federal salary (including benefits) is set to grow from $72,800 in 2008 to $75,419 in 2010, CBS reported. But the real action isn’t in what government employees are being paid today; it’s in what they’re being promised for tomorrow. Public pensions have swollen to unrecognizable proportions during the last decade. In June 2005, BusinessWeek reported that “more than 14 million public servants and 6 million retirees are owed $2.37 trillion by more than 2,000 different states, cities and agencies,” numbers that have risen since then. State and local pension payouts, the magazine found, had increased 50 percent in just five years.

These huge pension increases have eaten away at public finances, most spectacularly in California, where a bipartisan bill that passed virtually without debate unleashed the odious “3 percent at 50” retirement plan in 1999. Under this plan, at age 50 many categories of public employees are eligible for 3 percent of their final year’s pay multiplied by the number of years they’ve worked. So if a police officer starts working at age 20, he can retire at 50 with 90 percent of his final salary until he dies, and then his spouse receives that money for the rest of her life. Even during the economic crisis, “3 percent at 50” and the forces behind it have only become more entrenched.

In the midst of California’s 2008–09 fiscal meltdown, with the impact of deluxe public pensions making daily headlines, the city of Fullerton nevertheless sought to retroactively increase the defined-benefit retirement plan for its city employees by a jaw-dropping 25 percent. What’s more, the Fullerton City Council negotiated the increase in closed session, outside public view. Under California’s open meetings law, known as the Brown Act, even legitimate closed-session items such as contract negotiations are supposed to be advertised so that the public has a clear idea of what’s being discussed. But the Fullerton agenda for that night only vaguely referred to labor negotiations.

Four of the five council members—two Republicans and two Democrats—seemed to support the deal. But Republican Shawn Nelson, a principled advocate for limited government, didn’t appreciate the way the council was obscuring not only the legitimately secret details of the negotiations but the basic subject matter. He called me at the Register (where I worked at the time) and, without revealing details of the closed session, shared his concerns about the way the public had not been alerted. After I wrote about the secret, fiscally reckless deal, the recriminations came down in a hurry: on Shawn Nelson.

Not surprisingly, the liberal council members were furious that the public had been informed about what was going on. But some conservative Republicans, including a prominent state senator, Dick Ackerman of Irvine, were angry as well, because Nelson’s willingness to talk embarrassed a Republican councilman whom the GOP was backing for re-election. When I later bumped into Ackerman at the Republican National Convention in St. Paul, he laid into me about Nelson’s supposed violation of the Brown Act. Some officials and bloggers actually called for Nelson to be prosecuted. Local union mouthpieces and fellow council members portrayed the whistleblower as a common criminal, even though he was merely acting in the spirit of the open meetings law and showing the kind of fiscal responsibility you would hope to see in public officials.

In its embarrassment, the city council voted against the deal at the last minute, but only after council members publicly chastised Nelson, accused me of libel, and vowed to come back for more when the timing was right. One Republican councilman couldn’t figure out what the fuss was all about, given that the council enhances public employee pay and pensions all the time.

Pension Tsunami

Although Americans may have a vague sense that the nation has run up a great deal of debt, the public employee benefit problem is not well known. Yet the wave of benefit promises is poised to wash away state and local government budgets and large portions of the incomes of most Americans. Most of these benefits are vested, meaning that they have the standing of a legal contract. They cannot be reduced. And the government employees’ allies, such as California’s legislative Democrats, are cleverly blocking some of the more obvious exit strategies.

For instance, when the city of Vallejo went bankrupt after coughing up 75 percent of its budget to police and firefighters, the state Assembly introduced legislation that would allow cities to go bankrupt only if they get approval from a commission. Such a commission would of course be dominated by union-friendly members. The result: Cities would be stuck making good on contracts they cannot afford to fulfill.

When the economy was booming, these structural problems could be hidden. But not now. As debt loads become unsustainable, you can expect cuts in services, tax increases, pension-obligation bonds, or some combination of the three.

In California unfunded pension and health care liabilities for state workers top $100 billion, and the annual pension contribution has shot up from $320 million to $7.3 billion in less than a decade. In New York state, local governments may have to triple their annual pension contributions during the next six years, from $2.6 billion to $8 billion, according to the state comptroller.

That money will come from taxpayers. The average private-sector worker, who enjoys a lower salary and far lower retirement benefits than New York or California government workers, will have to work longer, retire later, and pay more so that his public-employee neighbors can enjoy the lifestyle to which they have become accustomed. The taxpayers will also have to deal with worsening public services, since there will be less money to pay for things that might actually benefit the public.

In July 2009, Orange County, California, Sheriff Sandra Hutchens proposed more than $20 million in budget cuts to close the gap caused by falling tax revenue. Her department slashed 40 percent of its command staff, cut a total of about 30 positions, and made changes that affected about 200 positions through reassignments, demotions, new overtime rules, and other maneuvers. “These are services that we believe are quite important to maintaining public safety, that we’re just not going to be able to continue,” department spokesman John MacDonald told the Los Angeles Times.

The sheriff failed to identify another reason for the tight budget: In 2001 the Orange County Board of Supervisors had passed a retroactive pension increase for sheriff’s deputies. That policy nearly doubled pension costs from 2000 to 2009, when pension contributions totaled nearly $95 million—20 percent of the sheriff’s budget. So the sheriff decries an economic downturn that is costing her department about $20 million, but she doesn’t mention that a previous pension increase is costing her department more than double that amount. It’s safe to say that had the pension increase not passed, the department would have money to keep officers on the streets and to avoid the cuts the sheriff claims are threatening public safety.

One would think that a “3 percent at 50” retirement would be a good enough deal for most people. Most workers in the private sector would probably jump at such an opportunity. But many public safety officials aren’t satisfied with a system that allows them to retire with 90 percent or more of their final year’s pay at young ages. They feel compelled to game the system in ways that stretch or break the law.

A large percentage of public safety officials —more than two-thirds of management-level officials at the California Highway Patrol, for instance—come down with something widely known as “Chief’s Disease” about a year before their scheduled retirement. “High-ranking [CHP] officers, nearing the end of their careers, routinely pursued disability claims that awarded them workers’ comp settlements,” John Hill and Dorothy Korber of the Sacramento Bee reported in 2004. “That, in turn, led in many cases to disability retirements. As they collected their disability pensions, some of these former CHP chiefs embarked on rigorous second careers—one as assistant sheriff of Yolo County, for example, another as the security director for San Francisco International Airport.”

When Mike Clesceri was mayor of Fullerton (a part-time position filled by a city council member), he also worked as an investigator for the Orange County District Attorney’s Office. As his retirement approached, Clesceri claimed to have an extreme case of acid reflux, which would help him net a tax-free pension of $58,000 a year, plus cost-of-living increases. Even while retired with that alleged disability, Clesceri pursued a local police chief’s job, retained his mayorship, and ran a tough re-election campaign. He even had the time to have his brother-in-law, an attorney, send threatening letters to members of the community who commented on the absurdity of his disability pension. As Clesceri explained in a newspaper column, the disability only applied to his job at the D.A.’s office.

The exposure of this abuse ultimately galvanized the public to boot Clesceri off the Fullerton City Council. The problem is most of these situations never get aired publicly.

Other state employees go to great lengths to find the highest-paying job they can in their final year, thereby locking in their permanent retirement benefit based on a salary they made only once. Bee reporters Hill and Korber told the story of Sharon McGraw, a Sacramento-area accounting manager for the state who moved from her suburban home to a tiny apartment in the San Francisco Bay area so she could temporarily take a high-paying job that would increase her pension benefit by $18,000 a year.

Then there’s the bizarre story of Armando Ruiz, a part-time trustee for the Coast Community College District in Southern California. Ruiz also worked full time as an administrator with the South Orange County Community College District. Ruiz wanted to run for re-election as a trustee and use the “incumbent” label on his ballot, but he also wanted to take advantage of a strange California law that dramatically increases an employee’s pension payout if he retires from two jobs on the same day.

“Ruiz ‘retired,’ effective Oct. 31, as a part-time trustee of the Coast district and as a full-time counselor at Irvine Valley College,” Register columnist Frank Mickadeit reported in 2008. “Even though the trustee gig pays just a $9,800 annual stipend, he was able to calculate his state pension as if he had been paid $106K a year for that ‘job’ plus the $106K a year he got for his real job at Irvine. So, based on a $212K salary he never really made, his pension will work out to about $108K a year for life. Otherwise, the pension would have been $59K—$54K for the real job; $5K for the trustee job. Even though Ruiz was officially retired from the Coast district board, he was still listed on Tuesday’s ballot as an incumbent. A cynical person might say that by waiting to ‘retire,’ just days before the election Ruiz knew it would be too late to change the ballots. And incumbents rarely lose such elections.”

The only good news from that scam: After Ruiz’s maneuver was exposed, the state legislature repealed the incomprehensible pension-spiking rule. But the pending pension crisis, with its thousands of abuses undetected by outside scrutiny, continues to loom over our heads.

The Public Sector Menace

In the summer of 2009, various Democratic candidates for California attorney general came before the Police Officers Research Association of California, a union lobbying organization, to ask for its support. According to one attendee (who asked to remain anonymous, given the obvious repercussions for his career), the organization had two basic questions for Assemblymen Ted Lieu (D-Torrance), Alberto Torrico (D-Newark), and Pedro Nava (D–Santa Barbara), each a candidate in the 2010 attorney general race. The first: Did they support the death penalty for cop killers? The second: Would each candidate, as attorney general, make sure the official summary of a state pension reform proposal would be slanted to destroy its chances of passing?

In California crafting ballot language is one of the most important jobs of the state’s attorney general. The police union officials reminded the candidates that 90 percent of voters read nothing more than the ballot title and summary, and they emphasized the importance of putting the kibosh to the measure. My source was appalled, not just by the directness of the question but by the eagerness with which the candidates, especially Torrico, answered it. They all promised they would help kill the measure.

Public-sector unions have a growing influence in state and federal governments, and in the overall labor movement, but they are a relatively recent phenomenon. Civil service unionization in the federal government wasn’t allowed until President John F. Kennedy issued an executive order legalizing it in 1962. In California it didn’t become legal until 1968. Yet now California may be spearheading the re-unionization of the country.

In a 2003 study of union membership rates, the sociologists Ruth Milkman and Daisy Rooks explained that “California stands out as an exception to the general pattern of the past decade. Against all odds, union density has inched upward in the nation’s most populous state, from 16.1 percent of all wage and salary workers in 1998 to 17.8 percent in 2002.”

The study was produced by the University of California Institute for Labor and Employment, itself a testament to union power in the Golden State. Critics call the institute Union University, arguing that the state is funding a left-wing advocacy and research organization that advances union causes. As the Los Angeles Times explained in a 2004 article about the controversy, “For years these programs received the majority of their funding from the budgets of the universities where they are housed. Then in the 2000–01 budget, former Gov. Gray Davis approved $6 million to create the institute encompassing the two centers and charged with carrying out ‘research, education and service involving the world of work, and the public and private policies that govern it.’ ”

In the 2003 study, Milkman and Rooks found that union growth in California’s public sector has far outpaced such growth in other states, for an obvious reason: “Organized labor has more political influence in California than in most other states.” In more-recent studies, the Institute for Labor and Employment found that for the first time in five decades, U.S. unionization rates actually increased in 2008. The reason: increases in California, mainly in the government sector.

At all levels, state and local government employment grew by 13 percent across the United States from 1994 to 2004. The number of judicial and legal employees increased by 28 percent. The number of public safety workers increased by 21 percent. The number of teachers increased by 22 percent.

Michael Hodges’ invaluable Grandfather Economic Report uses the Bureau of Labor Statistics to chart the growth in state and local government employees since 1946. Their number has increased from 3.3 million then to 19.8 million today—a 492 percent increase as the country’s population increased by 115 percent. Since 1999 the number of state and local government employees has increased by 13 percent, compared to a 9 percent increase in the population.

The United States had 2.3 state and local government employees per 100 citizens in 1946 and has 6.5 state and local government employees per 100 citizens now. In 1947, Hodges writes, 78 percent of the national income went to the private sector, 16 percent to the federal sector, and 6 percent to the state and local government sector. Now 54 percent of the economy is private, 28 percent goes to the feds, and 18 percent goes to state and local governments. The trend lines are ominous.

Bigger government means more government employees. Those employees then become a permanent lobby for continual government growth. The nation may have reached critical mass; the number of government employees at every level may have gotten so high that it is politically impossible to roll back the bureaucracy, rein in the costs, and restore lost freedoms.

People who are supposed to serve the public have become a privileged elite that exploits political power for financial gain and special perks. Because of its political power, this interest group has rigged the game so there are few meaningful checks on its demands. Government employees now receive far higher pay, benefits, and pensions than the vast majority of Americans working in the private sector. Even when they are incompetent or abusive, they can be fired only after a long process and only for the most grievous offenses.

It’s a two-tier system in which the rulers are making steady gains at the expense of the ruled. The predictable results: Higher taxes, eroded public services, unsustainable levels of debt, and massive roadblocks to reforming even the poorest performing agencies and school systems. If this system is left to grow unchecked, we will end up with a pale imitation of the free society envisioned by the Founders.

Steven Greenhut (stevengreenhut@gmail.com), the director of the Pacific Research Institute's Journalism Center, was a columnist for The Orange County Register for 11 years.

"Public-sector unions have a growing influence in state and federal governments, and in the overall labor movement, but they are a relatively recent phenomenon"

I am glad someone else has posted this topic which I have noted before on this board.

I've asked a few times before why it makes sense that people who work for the government can turn around and unionize and tell elected officials how much they should make and benefits they should get.

Instead of serving us we are serving them.

I also posted about a patient of mine who retired last year from the NJ TPK "Authority" and then shows up in my office recently with a disability form. I asked in honest amazement what he was talking about. He was not disabled and indeed had been working till he voluntarily retired just before. His answer was that a friend told him he could get more money this way than from retirement.

I asked was he claiming disability for his seizure disorder and he said yes. I noted he hadn't had a seizure for many years and it never prevented him from working before.

I came right and told him flatly no I will not sign the form and this is why this country goes broke, this is why everyone hires illegals, or sends jobs overseas. He agreed with me.

The concept that retirement is an entitlement the same as free speech, legal rights has got to go.

Double dipping is rampant.

Everyone knows that civil servant retirees who retire in their 50s go and get second jobs. Some of these second jobs the proverbial double and triple dipping is rampant.

My Federal employee relatives love to speak of being able to retire soon.

Of course on the backs of those of us who work in the private sector.

Yet they are happily for health care for all, and all the rest of the liberal crap. As always as long as they don't suffer for it.If I hear them speak one more time about "green" this or that.....

When Judge Richard Posner, the prolific conservative intellectual, released his book A Failure of Capitalism: The Crisis of '08 and the Descent Into Depression last year, you might have thought the final verdict was in: Capitalism caused the economic downturn and high unemployment.

That this verdict was pronounced by someone like Posner, who is associated with the University of Chicago and the free-market law and economics movement, gave moral support to all the politicians who were intent on exploiting the recession (as they exploit all crises) to increase government control of the economy.

But what exactly is this "capitalism" that is blamed?

The word "capitalism" is used in two contradictory ways. Sometimes it's used to mean the free market, or laissez faire. Other times it's used to mean today's government-guided economy. Logically, "capitalism" can't be both things. Either markets are free or government controls them. We can't have it both ways.

The truth is that we don't have a free market—government regulation and management are pervasive—so it's misleading to say that "capitalism" caused today's problems. The free market is innocent.

But it's fair to say that crony capitalism created the economic mess.

Crony capitalism, by the way, will be the subject of my TV show this week on the Fox Business Network (Thursday at 8 p.m. Eastern; Friday at 10).

What is crony capitalism? It's the economic system in which the marketplace is substantially shaped by a cozy relationship among government, big business, and big labor. Under crony capitalism, government bestows a variety of privileges that are simply unattainable in the free market, including import restrictions, bailouts, subsidies, and loan guarantees.

Crony capitalism is as old as the republic itself. Congress' first act in 1789—on July 4, no less!—was a tariff on foreign goods to protect influential domestic business interests.

We don't have to look far to see how crony-dominated American capitalism is today. The politically connected tire and steel industries get government relief from a "surge" of imports from China. (Who cares if American consumers want to pay less for Chinese steel and tires?) Crony capitalism, better know as government bailouts, saved General Motors and Chrysler from extinction, with Barack Obama cronies the United Auto Workers getting preferential treatment over other creditors and generous stock holdings (especially outrageous considering that the union helped bankrupt the companies in the first place with fat pensions and wasteful work rules). Banks and insurance companies (like AIG) are bailed out because they are deemed too big to fail. Favored farmers get crop subsidies.

If free-market capitalism is a private profit-and-loss system, crony capitalism is a private-profit and public-loss system. Companies keep their profits when they succeed but use government to stick the taxpayer with the losses when they fail. Nice work if you can get it.

The role that regulation plays in crony capitalism is unappreciated. Critics of business assume that regulation is how government tames corporations. But historically, regulation has been how one set of businesses (usually bigger, well-connected ones) gains advantages over others. Timothy Carney's book about this, The Big Ripoff: How Big Business and Big Government Steal Your Money, explains why Phillip Morris joined the "war on tobacco," General Motors pushed for clean-air legislation, and Archer Daniels Midland likes ethanol subsidies.

As economist Bruce Yandle writes, "(I)ndustry support of regulation is not rare at all; indeed, it is the norm."

If you wonder why, ask yourself: Which are more likely to be hampered by vigorous regulatory standards: entrenched corporations with their overstaffed legal and accounting departments or small startups trying to get off the ground? Regulation can kill competition—and incumbents like it that way.

When will Michael Moore figure this out? His last movie attacked what he calls capitalism, but his own work shows that it's not the free market that causes the ills he abhors. Had he called the movie Crony Capitalism: A Love Story, he would have been on firmer ground.

It's time we acknowledged the difference between the free market, which is based on freedom and competition, and crony capitalism, which is based on privilege. Adam Smith knew the difference—and chose the free-market.

What's taking us so long?

John Stossel is host of Stossel on the Fox Business Network. He's the author of Give Me a Break and of Myth, Lies, and Downright Stupidity. To find out more about John Stossel, visit his site at johnstossel.com.

"Daunting." "Unsustainable." These are the sort of adjectives the Congressional Budget Office—about as calm and reserved an office as exists in Washington—uses when it reports on the country's fiscal future. Given the agency's penchant for cautious understatement, you might translate the gist of its big-deal budget reports something like this: "Budget-wise, we're probably screwed."

But at least we'll have lengthy CBO reports to burn for warmth (and roast marshmallows over!) after the budgepocalypse. Today, the CBO released yet another detail-packed mega-report on the country's budgetary outlook, covering the period from 2010-2020. And as the cowboys say in cartoon Westerns, it ain't purdy. "Under current law," the report reads, "the federal fiscal outlook beyond this year is daunting."

Key findings include:

Projected average yearly deficits of about $600 billion for each of the next 10 years. That's around $6 trillion total, $1.35 trillion of which we'll see just this year.Significantly higher debt, fueled by those high deficits. By the end of 2020, public debt is expected to equal 67 percent of GDP—up from 53 percent in 2009.As a result, the report says, "interest payments on the debt are poised to skyrocket." According to CBO projections, annual spending on interest payments will triple.Complicating the picture is that CBO's projections, as a rule, have to assume that current law will stay in effect, and unchanged, for the duration of the projection period. That means that, for example, the projections include revenue generated from tax cuts that supposedly expire but are widely expected to be renewed. The report also assumes that appropriations spending will rise in line with inflation rather than with GDP. The result, as the report states explicitly, is that "baseline projections understate the budget deficits that would arise under many observers' understanding of current policy." Or, to put it another way, if everything goes the way everyone expects everything to go, things will actually be even worse than we're predicting.

Combine this with the office's summer 2009 report on the long term budget outlook, in which CBO director Douglas Elmendorf called the country's long-term budgetary path "unsustainable," and you get a fairly unsettling picture of a country hurtling towards, if not actual disaster, then some serious fiscal pain. As the summer report noted, the options for righting the course are limited: raise taxes or cut spending, and soon. I know which one I think is more likely, given the current state of affairs, but neither's exactly an easy sell. And knowing how willing politicians typically are to do either, I'd say that's a daunting outlook, indeed.

Official summary of today's report here. Read my long feature on the CBO's history here. ﻿

Most far leftists I meet come in two flavors. Some think the government is so freaking omnipotent that, gosh darn it, all they have to do write sensitive enough policies and write enough checks to fix all the problems that ail us. Let's call them the Useful Idiots. The second type are True Believers who want the evil United States to implode and so seek to impose every irresponsible burden they can in the hope of hastening that implosion. I think both types are represented in BHO's coterie.

We need a president ready to go Texas chainsaw on the budget, hell with the bureaucrats and trim things back down. DHS needs to be parted back out-it obviously isn't working in its current state so the "coordinators" are obviously a waste of money. Trim BATFE the continually seem to be an instrument used to violate the 2nd amendment, and seem to have an institutionalized contempt for the citizenry. Americorps seems to be another one of those programs that has done little, they did not show up for Katrina like they should have given their "young pool of labor" mandate that was publicized a few years back. What can be trimmed from these Infrastructure renewal and Bailout programs that are giving out money, but not using any due diligence for getting good value?

I think there are several older programs that could be cut too, but I would consider those measures kind of draconian given how many americans are dependant on them. I think that a lot of the cuts could be made on the Citizen vs. Non-Citizen divide tho'

Gradually raise the age for Soc. Security. When the age of 65 was set the average lifespan was 68. Now its somewhere around 80.

Super important: Abolish the Orwellian fiction/fraud called "baseline budgeting" and require govt to use the same accounting principles as everyone else. Under BB reductions in the rate of increase are called "cuts" even though more money than the year before is being spent. Until we do this, I fear we will always lose the current game of Three Card Monte.

Only Bonafide Citizens can get welfare benefits, and then only for long enough to regain their footing. This living in FEMA trailer crap is just that, and a real american would not remain on welfare any longer than he had to. (I think a real free person would rather starve to death than to take a hand out, but one must make allowances.)

Arthur Laffer, creator of the Laffer Curve that showed how low tax rates boost economic growth, is warning anyone who will listen that the economy is headed for a “train wreck” in 2011 that will make the current recession look tame by comparison.

The famed economist, whose supply-side, tax-cutting policies enacted by President Reagan in 1981 put the economy on a record-breaking, 25-year economic trajectory of growth and prosperity, is telling Americans not to be lulled by sporadic signs of growth this year, because the economy is headed for a sharper decline next year when tax rates are expected to jump sharply, sending the economy into a new tailspin.

“It will make the decline in U.S. output from 2010 to 2011 worse than the decline in output in 2008 and 2009 which will catastrophic,” Laffer said in an interview with HUMAN EVENTS.

In a wide-ranging discussion about where the economy is headed, and the fiscal, tax and monetary reasons why, Laffer gives a bleak forecast of where President Obama and his administration are taking the country in the next three years -- which he predicts will end with Obama’s defeat in 2012.

“Obama is a fine, very impressive person. He really is. Unfortunately, everything that he is doing in economics is exactly wrong. He is a crappy president,” Laffer said.

“Whenever a country is in the throes of spending too much and raising taxes, it’s a fiscal catastrophe in the making and this is what is happening now,” he said.

The economy in the short-term this year “will continue to improve, growing by more than 4 percent. By the end of 2010 the unemployment rate could fall to as low as 7 percent and the Obama administration will be busting with pride and conceit,” Laffer told his clients in his latest economic outlook for the year ahead.

But don’t be fooled into thinking the economy is actually coming out of one of the worst recessions of the post-war era, because this year will be a false recovery, he adds. The downturn will begin again when “2011 will enter center stage, followed quickly by an economic catastrophe. All the factors that will make 2010 (and have already made the last half of 2009) look so good will reverse direction, and 2011 will be a train wreck,” he said in his forecast.

The big reason, among several, is Obama’s plan to allow the Bush tax cuts to expire at the end of this year, and other tax increases the Obama administration intends to enact this year and next, and how businesses will respond to these tax changes.

“In anticipation of known tax increases the economy will shift income and output from 2011 -- the higher tax year -- into 2010 -- the lower tax year. As a result of this income shift, 2010 will look a lot better than it should, and 2011 will be a train wreck,” he predicts.

“GDP growth in 2010 will be some 3 to 4 percent higher than it otherwise should be, thus green shoots,” he said. “The transfer of income from 2011 into 2010 will not only make 2010 [economic growth] higher than it otherwise would be, it will also make 2011 [economic growth] 3 and 4 percent lower than it otherwise should be because people have shifted income out of 2011 into 2010.”

“The effect of the shift in income on GDP growth in 2010, however, is going to be fairly substantial, but when the U.S. economy comes to 2011, the train’s going to come off the tracks.”

But the tax picture also will grow darker this year as the country heads into the midterm elections, Laffer said. “In 2010 the U.S. will have a payroll tax rate increase, an estate tax increase and income tax increases. There’s also a tax increase coming in 2010 on carried interest. This rate will rise from its current level of 15 percent to 35 percent, and then it will rise again in 2011.”

Many economists are predicting modest growth rates this year, but high unemployment, too, which the Federal Reserve Board’s economists are projecting will be in the mid-to-high 9 percent range into the fourth quarter. Others say it could go higher. The national unemployment rate is at 10 percent, but if you count workers who have given up looking for work and those who are in temp jobs, the real jobless rate is over 17 percent. Last week, the Labor Department said that 43 states saw their unemployment rates rise in December, especially in key Democratic strongholds such as Ohio, Michigan, Pennsylvania and California.

“We are presently in a dangerously risky economic environment, more risky than any in memory and that includes the 1970s,” said Stanford economist John Cogan, a former Reagan administration fiscal adviser.

“The primary sources of that risk come from uncertainty about U.S. government economic policy. In the area of taxation, personal income taxes, especially those on savings and capital formation, are set to rise substantially in a year,” Cogan told me. “How high tax rates will rise and what activities will be hit hardest creates a sizeable risk this year for investors and businesses.”

Cogan is especially worried about the damage that will come from the administration’s “unprecedented peacetime deficits. Because we are in uncharted territory, there is considerable uncertainty about how bad the consequences of the run-up in debt will be. But we do know that they won’t be good.”

The mountain of debt that Obama is piling up is breathtaking and Laffer says it will put unprecedented burdens on the economy that will only get worse under his proposed tax and spending policies. Federal, state and local government spending has climbed to 38 percent of GDP, with the federal government’s spending binge accounting for 27 percent of GDP, he said.

Earlier this month, Laffer presented his economic forecasts to several dozen conservative House members at a private policy briefing retreat held in Charlottesville, Va., sponsored by the Heritage Foundation. Laffer’s presentation was said to be the high point of the retreat.

The reason: Laffer doesn’t mince words and placed economic growth options in front of the lawmakers in blunt and dramatic terms that few if any economists have the courage to tackle.

For example, he remains convinced that Congress should never have spent the bailout money it has dished out so far, which he puts “at about $3 trillion. “We should have done nothing. I was pretty much alone in that position near the end of 2008,” he told me.

“If you total what the government takes in the income tax, corporate tax, Social Security taxes, capital gains taxes, all of that adds up to $2.2 trillion in tax receipts and they spent $3.5 trillion,” he said.

Instead of the massive bailouts, stimulus and other giveaway programs, Laffer says, “I would have had a federal tax holiday. No taxes of any sort for a year and nine months which comes out to $3.5 trillion.

“Can you imagine what would have happened to the economy. We’d have an unemployment rate of three percent and the economy would be growing like mad and we’d be way out of this problem,” he said.

After one year in office, Obama’s $800 billion spending stimulus plan has provided little if any stimulus to the economy and produce few if any permanent new jobs. The administration promised that the unemployment rate would be down to about 7 percent by now, but in fact the jobless number has climbed higher as Obama’s job approval numbers have fallen sharply and an increasing number of Democratic lawmakers are in trouble or have decided not to seek re-election.

Obama’s answer is another spending “stimulus” bill of perhaps $200 billion or more, new, Draconian regulations and tax hikes on the nation’s troubled financial system, and moving ahead with costly health care plan, job-killing climate change bills and other legislation that will drive up the government’s massive debt.

“All in all, the risk facing our economy from these policy uncertainties is severe,” Cogan told me this week. “This uncertainty will certainly retard the economy’s recovery this year and, depending on what policy actions are taken, it could profoundly damage the economy in 2011 and subsequent years.”

Mr. Lambro is a nationally syndicated columnist and chief political correspondent for the Washington Times.

I remember how the Reagan rate cuts were phased in over three year. Laffer predicted huge growth kicking in as the final lowest rate kicked in. Monetarist Milt Friedman, reading his monetary tea leaves predicted quite the contrary. Laffer was proven right.

I think his analysis is dead on here unless BO dramatically reverses course.

In this issue: The Statistical Recovery has ArrivedThis Time Is DifferentA Crisis of ConfidenceGreeks Bearing GiftsBiotech, Conversations and Babies

"Our immersion in the details of crises that have arisen over the past eight centuries and in data on them has led us to conclude that the most commonly repeated and most expensive investment advice ever given in the boom just before a financial crisis stems from the perception that 'this time is different.' That advice, that the old rules of valuation no longer apply, is usually followed up with vigor. Financial professionals and, all too often, government leaders explain that we are doing things better than before, we are smarter, and we have learned from past mistakes. Each time, society convinces itself that the current boom, unlike the many booms that preceded catastrophic collapses in the past, is built on sound fundamentals, structural reforms, technological innovation, and good policy."

- This Time is Different (Carmen M. Reinhart and Kenneth Rogoff)

When does a potential crisis become an actual crisis, and how and why does it happen? Why did most everyone believe there were no problems in the US (or Japanese or European or British) economies in 2006? Yet now we are mired in a very difficult situation. "The subprime problem will be contained," said now controversially confirmed Fed Chairman Bernanke, just months before the implosion and significant Fed intervention. I have just returned from Europe, and the discussion often turned to the potential of a crisis in the Eurozone if Greece defaults. Plus, we take a look at the very positive US GDP numbers released this morning. Are we finally back to the Old Normal? There's just so much to talk about.

, , ,

The Statistical Recovery Has ArrivedBefore we get into the main discussion point, let me briefly comment on today's GDP numbers, which came in at an amazingly strong 5.7% growth rate. While that is stronger than I thought it would be (I said 4-5%), there are reasons to be cautious before we sound the "all clear" bell.

First, over 60% (3.7%) of the growth came from inventory rebuilding, as opposed to just 0.7% in the third quarter. If you examine the numbers, you find that inventories had dropped below sales, so a buildup was needed. Increasing inventories add to GDP, while, counterintuitively, sales from inventory decrease GDP. Businesses are just adjusting to the New Normal level of sales. I expect further inventory build-up in the next two quarters, although not at this level, and then we level off the latter half of the year.

While rebuilding inventories is a very good thing, that growth will only continue if sales grow. Otherwise inventories will find the level of the New Normal and stop growing. And if you look at consumer spending in the data, you find that it actually declined in the 4th quarter, both annually and from the previous quarter. "Domestic demand" declined from 2.3% in the third quarter to only 1.7% in the fourth quarter. Part of that is clearly the absence of "Cash for Clunkers," but even so that is not a sign of economic strength.

Second, as my friend David Rosenberg pointed out, imports fell over the 4th quarter. Usually in a heavy inventory-rebuilding cycle, imports rise because a portion of the materials businesses need to build their own products comes from foreign sources. Thus the drop in imports is most unusual. Falling imports, which is a sign of economic retrenching, also increases the statistical GDP number.

Third, I have seen no analysis (yet) on the impact of the stimulus spending, but it was 90% of the growth in the third quarter, or a little less than 2%.

Fourth (and quoting David): "... if you believe the GDP data - remember, there are more revisions to come - then you de facto must be of the view that productivity growth is soaring at over a 6% annual rate. No doubt productivity is rising - just look at the never-ending slate of layoff announcements. But we came off a cycle with no technological advance and no capital deepening, so it is hard to believe that productivity at this time is growing at a pace that is four times the historical norm. Sorry, but we're not buyers of that view. In the fourth quarter, aggregate private hours worked contracted at a 0.5% annual rate and what we can tell you is that such a decline in labor input has never before, scanning over 50 years of data, coincided with a GDP headline this good.

"Normally, GDP growth is 1.7% when hours worked is this weak, and that is exactly the trend that was depicted this week in the release of the Chicago Fed's National Activity Index, which was widely ignored. On the flip side, when we have in the past seen GDP growth come in at or near a 5.7% annual rate, what is typical is that hours worked grows at a 3.7% rate. No matter how you slice it, the GDP number today represented not just a rare but an unprecedented event, and as such, we are willing to treat the report with an entire saltshaker - a few grains won't do."

Finally, remember that third-quarter GDP was revised downward by over 30%, from 3.5% to just 2.2% only 60 days later. (There is the first release, to be followed by revisions over the next two months.) The first release is based on a lot of estimates, otherwise known as guesswork. The fourth-quarter number is likely to be revised down as well.

Unemployment rose by several hundred thousand jobs in the fourth quarter, and if you look at some surveys, it approached 500,000. That is hardly consistent with a 5.7% growth rate. Further, sales taxes and income-tax receipts are still falling. As I said last year that it would be, this is a Statistical Recovery. When unemployment is rising, it is hard to talk of real recovery. Without the stimulus in the latter half of the year, growth would be much slower.

So should we, as Paul Krugman suggests, spend another trillion in stimulus if it helps growth? No, because, as I have written for a very long time, and will focus on in future weeks, increased deficits and rising debt-to-GDP is a long-term losing proposition. It simply puts off what will be a reckoning that will be even worse, with yet higher debt levels. You cannot borrow your way out of a debt crisis.

This Time Is DifferentWhile I was in Europe, and flying back, I had the great pleasure of reading This Time is Different, by Carmen M. Reinhart and Kenneth Rogoff, on my new Kindle, courtesy of Fred Fern.

I am going to be writing about and quoting from this book for several weeks. It is a very important work, as it gives us the first really comprehensive analysis of financial crises. I highlighted more pages than in any book in recent memory (easy to do on the Kindle, and even easier to find the highlights). Rather than offering up theories on how to deal with the current financial crisis, the authors show us what happened in over 250 historical crises in 66 countries. And they offer some very clear ideas on how this current crisis might play out. Sadly, the lesson is not a happy one. There are no good endings once you start down a deleveraging path. As I have been writing for several years, we now are faced with choosing from among several bad choices, some being worse than others. This Time is Different offers up some ideas as to which are the worst choices.

If you are a serious student of economics, you should read this book. If you want to get a sense of the problems we face, the authors conveniently summarize the situation in chapters 13-16, purposefully allowing people to get the main points without drilling into the mountain of details they provide. Get the book at a 45% discount at Amazon.com.

Buy it with the excellent book I am now reading, Wall Street Revalued, and get free shipping.

A Crisis of ConfidenceLet's lead off with a few quotes from This Time is Different, and then I'll add some comments. Today I'll focus on the theme of confidence, which runs throughout the entire book.

"But highly leveraged economies, particularly those in which continual rollover of short-term debt is sustained only by confidence in relatively illiquid underlying assets, seldom survive forever, particularly if leverage continues to grow unchecked."

"If there is one common theme to the vast range of crises we consider in this book, it is that excessive debt accumulation, whether it be by the government, banks, corporations, or consumers, often poses greater systemic risks than it seems during a boom. Infusions of cash can make a government look like it is providing greater growth to its economy than it really is. Private sector borrowing binges can inflate housing and stock prices far beyond their long-run sustainable levels, and make banks seem more stable and profitable than they really are. Such large-scale debt buildups pose risks because they make an economy vulnerable to crises of confidence, particularly when debt is short term and needs to be constantly refinanced. Debt-fueled booms all too often provide false affirmation of a government's policies, a financial institution's ability to make outsized profits, or a country's standard of living. Most of these booms end badly. Of course, debt instruments are crucial to all economies, ancient and modern, but balancing the risk and opportunities of debt is always a challenge, a challenge policy makers, investors, and ordinary citizens must never forget."

And this is key. Read it twice (at least!):

"Perhaps more than anything else, failure to recognize the precariousness and fickleness of confidence-especially in cases in which large short-term debts need to be rolled over continuously-is the key factor that gives rise to the this-time-is-different syndrome. Highly indebted governments, banks, or corporations can seem to be merrily rolling along for an extended period, when bang!-confidence collapses, lenders disappear, and a crisis hits.

"Economic theory tells us that it is precisely the fickle nature of confidence, including its dependence on the public's expectation of future events, that makes it so difficult to predict the timing of debt crises. High debt levels lead, in many mathematical economics models, to "multiple equilibria" in which the debt level might be sustained - or might not be. Economists do not have a terribly good idea of what kinds of events shift confidence and of how to concretely assess confidence vulnerability. What one does see, again and again, in the history of financial crises is that when an accident is waiting to happen, it eventually does. When countries become too deeply indebted, they are headed for trouble. When debt-fueled asset price explosions seem too good to be true, they probably are. But the exact timing can be very difficult to guess, and a crisis that seems imminent can sometimes take years to ignite."

How confident was the world in October of 2006? I was writing that there would be a recession, a subprime crisis, and a credit crisis in our future. I was on Larry Kudlow's show with Nouriel Roubini, and Larry and John Rutledge were giving us a hard time about our so-called "doom and gloom." If there is going to be a recession you should get out of the stock market, was my call. I was a tad early, as the market proceeded to go up another 20% over the next 8 months.

As Reinhart and Rogoff wrote: "Highly indebted governments, banks, or corporations can seem to be merrily rolling along for an extended period, when bang! - confidence collapses, lenders disappear, and a crisis hits."

Bang is the right word. It is the nature of human beings to assume that the current trend will work out, that things can't really be that bad. Look at the bond markets only a year and then just a few months before World War I. There was no sign of an impending war. Everyone "knew" that cooler heads would prevail.

We can look back now and see where we made mistakes in the current crisis. We actually believed that this time was different, that we had better financial instruments, smarter regulators, and were so, well, modern. Times were different. We knew how to deal with leverage. Borrowing against your home was a good thing. Housing values would always go up. Etc.

Now, there are bullish voices telling us that things are headed back to normal. Mainstream forecasts for GDP growth this year are quite robust, north of 4% for the year, based on evidence from past recoveries. However, the underlying fundamentals of a banking crisis are far different from those of a typical business-cycle recession, as Reinhart and Rogoff's work so clearly reveals. It typically takes years to work off excess leverage in a banking crisis, with unemployment often rising for 4 years running. We will look at the evidence in coming weeks.

The point is that complacency almost always ends suddenly. You just don't slide gradually into a crisis, over years. It happens! All of a sudden there is a trigger event, and it is August of 2008. And the evidence in the book is that things go along fine until there is that crisis of confidence. There is no way to know when it will happen. There is no magic debt level, no magic drop in currencies, no percentage level of fiscal deficits, no single point where we can say "This is it." It is different in different crises.

One point I found fascinating, and we'll explore it in later weeks. First, when it comes to the various types of crises with the authors identify, there is very little difference between developed and emerging-market countries, especially as to the fallout. It seems that the developed world has no corner on special wisdom that would allow crises to be avoided, or allow them to be recovered from more quickly. In fact, because of their overconfidence - because they actually feel they have superior systems - developed countries can dig deeper holes for themselves than emerging markets.

Oh, and the Fed should have seen this crisis coming. The authors point to some very clear precursors to debt crises. This bears further review, and we will do so in coming weeks.

Greeks Bearing GiftsOn Monday, the government of Greece offered a "gift" to the markets of 8 billion euros worth of bonds at a rather high 6.25%. The demand was for 25 billion euros, so this offering was rather robust. Today, those same Greek bonds closed on 6.5%, more than offsetting the first year's coupon. Greek bond yields are up more than 150 basis points in the last month!

Why such a one-week turnaround? Ambrose Evans Pritchard offers up this thought: "Marc Ostwald, from Monument Securities, said the botched bond issue of €8bn (£6.9bn) of Greek debt earlier this week has made matters worse. Many of the investors were 'hot money' funds that bought on rumors that China was emerging as a buyer, offering them a chance for quick profit. When the China story was denied by Beijing and Athens, these funds rushed for the exit."

Greece is running a budget deficit of 12.5%. Under the Maastricht Treaty, they are supposed to keep it at 3%. Their GDP was $374 billion in 2008 (about €240 billion). If they can cut their budget deficit to 10% this year, that means they will need to go into the bond market for another €25 billion or so. But they already have a problem with rising debt. Look at the following graph on the debt of various countries.

When Russia defaulted on its debt and sent the world into crisis in 1998, they had total debt of only €51 billion. Greece now has €254 billion and added another €8 billion this week, and needs to add another €24 billion (or so) later this year. That's a debt-to-GDP ratio of over 100%, well above the limit of the treaty, which is 60%.

Greece benefitted from being in the Eurozone by getting very low interest rates, up until recently. Being in the Eurozone made investors confident. Now that confidence is eroding daily. And this week's market action says rates will go higher, without some fiscal discipline. To help my US readers put this in perspective, let's assume that Greece was the size of the US. To get back to Maastricht Treaty levels, they would need to cut the deficit by 4% of GDP for the next few years. If the US did that, it would mean an equivalent budget cut of $500 billion dollars. Per year. For three years running.

That would guarantee a very deep recession. Just a 10% suggested pay cut has Greek government unions already planning strikes. Nevertheless, the government of Greece recognizes that it simply cannot continue to run such huge deficits. They have developed a plan that aims to narrow the shortfall from 12.7% of output, more than four times the EU limit, to 8.7% this year. That reduction will be achieved even though the economy will contract 0.3%, the plan says. The deficit will shrink to 5.6% next year and 2.8% in 2012.

The market is saying they don't believe that will happen. For one thing, if the Greek economy goes into recession, the amount collected in taxes will fall, meaning the shortfall will increase. Second, it is not clear that Greek voters will approve such a plan at their next elections. Riots and demonstrations are a popular pastime.

Both French and German ministers made it clear that there would be no bailout of Greece. But here's the problem. If they ignore the noncompliance, there is no meaning to the treaty. The euro will be called into question. And the other countries with serious fiscal problems will ask why they should cut back if Greece does not. If Greece does not choose deep cutbacks and recession, the markets will keep demanding hikes in interest rates, and eventually Greece will have problems meeting just its interest payments.

Can this go on for some time? The analysis of debt crises in history says yes, but there comes a time when confidence breaks. My friends from GaveKal had this thought:

"What is the next step? Having lived through the Mexican, Thai, Korean and Argentine crises, it is hard not to distinguish a common pattern. In our view, this means that investors need to confront the fact that we are at an important crossroads for Greece, best symbolized by a simple question: 'If you were a Greek saver with all of your income in a Greek bank, given what is happening to the debt of your sovereign, would you feel comfortable keeping all of your life savings in your savings institution? Or would you start thinking about opening an account in a foreign bank and/or redeeming your currency in cash?' The answer to this question will likely direct the next phase of the crisis. If we start to see bank runs in Greece, then investors will have to accept that the crisis has run out of control and that we are facing a far more bearish investment environment. However, if the Greek population does not panic and does not liquefy/transfer its savings, then European policy-makers may still have a chance to find a political solution to this growing problem.

"What could a political solution be? The answer here is simple: there is none. So if Europe wants to save Greece from hitting the wall towards which it is now heading, the European commission, the ECB and/or other institutions (IMF?) will have to bend the rules massively. In turn, this will likely lead to a further collapse in the euro. But for us, an important question is whether it could also lead to a serious political backlash. Indeed, at this stage, elected politicians are likely pondering how much appetite there is amongst their electorate for yet another bailout, and for further expansions in government debt levels. The fact that the intervention would occur on behalf of a foreign country probably makes it all the more unpalatable (it's one thing to save your domestic banking system ... but why save Greece?)."

If Greece is bailed out, Portugal and Ireland will ask "Why not us?" And Spain? Italy? If Greece is allowed to flaunt the rules, what does that say about the future of the euro? Will Germany and France insist on compliance or be willing to kick Greece out?

A few months ago, the markets assumed that not only Greece but Portugal, Italy, Spain, and Ireland would have a few years to get their houses in order. This week, the markets shortened their time horizon for Greece.

Even so, we get this quote, which may end up ranking alongside Fisher's quote in 1929, that the stock market was at a permanently high plateau, or Bernanke's quote that "The subprime debt problem will be contained."

"There is no bailout problem," Monetary Affairs Commissioner Joaquin Almunia said today at the World Economic Forum's annual meeting in Davos, Switzerland. "Greece will not default. In the euro area, default does not exist."

The evidence in This Time is Different is that default risk does in fact exist. You cannot keep borrowing past your income, whether as a family or a government, and not eventually go bankrupt.

Are we at an inflection point? Too early to say. It all depends on the willingness of the Greek people to endure what will not be a fun next few years, for the privilege of staying in the Eurozone. And on whether the bond market believes that this time is different and the Greeks will actually get their fiscal house in order.

Oh by the way, did I mention that the history of Greece is not exactly pristine in terms of default? In fact, they have been in default in one way or another for 105 out of the past 200 years. Aristotle, can you spare a dime?

And one last thought. The US is running massive deficits. If we do not get them under control, we will one day, and perhaps quite soon, face our own "Greek moment." Look at the graph below, and weep.

Obama offering to freeze spending by 17% in US discretionary-spending programs, after he ran them up over 20% in just one year, is laughable. Greece is an object lesson for the world, as Japan soon will be. You cannot cure too much debt with more debt.

“Wealthy Face Higher Taxes.” That’s the headline that greeted two million American businesspeople Tuesday when they opened their Wall Street Journals. Inside, another banner head: “Big Firms Would Face Deeper Tax Bite.” Turn to the New York Times: “A Red-Ink Decade/Obama Budget Sees Years of Deficits.” The Financial Times: “Obama to target overseas tax breaks.” Investor’s Business Daily: “Higher Taxes for All in Obama Budget, $1.6 Tril 2010 Deficit.” And the Washington Post (not that many productive people get that on their doorstep): “Obama budget would spend billions more.”

And President Obama wonders why banks aren’t lending, employers aren’t hiring, and investors are holding back? As the Economic Policy Institute illustrates, this is the slowest recovery of any postwar recession.

Let’s hope the Obama administration soon learns that higher taxes, more regulation, a larger share of GDP shifted to government, fears of Fed monetization of soaring debt — not to mention newspaper reports of Obama budgeteers “flipp[ing] through the tax code, looking for ideas” — can only discourage employers, investors, and entrepreneurs. Robert Higgs has cited the role of “regime uncertainty” in prolonging the Great Depression, as investors worried about what FDR might do next. Will Wilkinson points to Treasury Secretary Tim Geithner’s saying “businesses want certainty. They need certainty so they can make long-term plans today.” Unfortunately, Will says, “Creating completely irresponsible, economically chilling regime uncertainty would appear to be the basic modus operandi of the Obama administration.”

Obama is looking pretty spiteful, considering his remarks about the supreme court. Is he now taxing big business extra in hopes of ruining their "campaign budgets"? (saying in jest)

I just finished this months Wired magazine. It was talking about a new, second industrial revolution where small firms operating out of a garage with a 3d printer are able to mock up a product, and buy production time from a flexible manufaturing facility. Manufacturing will become more like machine shops which do "job lots" of a few hundred or thousand items. Thes niche developers would be able to compete with the big businesses because the internet leverages their skills and allows "top players" to network for a single project rather than having to talk between cubilcles in a larger firm, which usually has top talent in only a few positions.

Ezxamples would be the Aliph, Segway, and a couple of ninche start ups that haven't got their products out yet.

Maybe this would be the type of thing to pull us out of our doldrums- Niche Manufacture?

I can't find the article on the Wired website the title is "Atoms Are The New Bits", if it should show up. Here are 2 links from the article: local-motors.com/ a car designed and built on the crowdsourcing concept. It is a diesel powered sports car using off the shelf parts, and custom built body panels. 500-1000 units. Then you have:http://brickarms.com/ that builds litle guns for lego figurines. They look like real guns like AK's, M16's and Lewis MG's.

Jeffrey Friedman is the editor of Critical Review and of Causes of the Financial Crisis, forthcoming from the University of Pennsylvania Press.

You are familiar by now with the role of the Federal Reserve in stimulating the housing boom; the role of Fannie Mae and Freddie Mac in encouraging low-equity mortgages; and the role of the Community Reinvestment Act in mandating loans to "subprime" borrowers, meaning those who were poor credit risks. So you may think that the government caused the financial crisis. But you don't know the half of it. And neither does the government.

A full understanding of the crisis has to explain not just the housing and subprime bubbles, but why, when they popped, it should have had such disastrous worldwide effects on the financial system. The problem was that commercial banks had made a huge overinvestment in mortgage-backed bonds sold by investment banks such as Lehman Brothers.

Commercial banks are familiar to everyone with a checking or savings account. They accept our deposits, against which they issue commercial loans and mortgages. In 1933, the United States created the FDIC to insure commercial banks' depositors. The aim was to discourage bank runs by depositors who worried that if their bank had made too many risky loans, their accounts, too, might be at risk.

The question of whether deposit insurance was necessary is worth asking, and I will ask it later on. But for now, the key fact is that once deposit insurance took effect, the FDIC feared that it had created what economists call a "moral hazard": bankers, now insulated from bank runs, might be encouraged to make riskier loans than before. The moral-hazard theory took hold not only in the United States but in all of the countries in which deposit insurance was instituted. And both here and abroad, the regulators' solution to this (real or imagined) problem was to institute bank-capital regulations. According to an array of scholars from around the world — Viral Acharya, Juliusz Jablecki, Wladimir Kraus, Mateusz Machaj, and Matthew Richardson — these regulations helped turn an American housing crisis into the world's worst recession in 70 years.

WHAT REALLY WENT WRONG

The moral-hazard theory held that since the FDIC would now pick up the pieces if anything went wrong, bankers left to their own devices would make clearly risky loans and investments. The regulators' solution, across the entire developed world, was to require banks to hold a minimum capital cushion against a commercial bank's assets (loans and investments), but the precise level of the capital reserve, and other details, varied from country to country.

In 1988, financial regulators from the G-10 agreed on the Basel (I) Accords. Basel I was an attempt to standardize the world's bank-capital regulations, and it succeeded, spreading far beyond the G-10 countries. It differentiated among the risks presented by different types of assets. For instance, a commercial bank did not have to devote any capital to its holdings of government bonds, cash, or gold — the safest assets, in the regulators' judgment. But it had to allot 4 percent capital to each mortgage that it issued, and 8 percent to commercial loans and corporate bonds.

Each country implemented Basel I on its own schedule and with its own quirks. The United States implemented it in 1991, with several different capital cushions; a 10 percent cushion was required for "well-capitalized" commercial banks, a designation that carries privileges that most banks want. Ten years later, however, came what proved in retrospect to be the pivotal event. The FDIC, the Fed, the Comptroller of the Currency, and the Office of Thrift Supervision issued an amendment to Basel I, the Recourse Rule, that extended the accord's risk differentiations to asset-backed securities (ABS): bonds backed by credit card debt, or car loans — or mortgages — required a mere 2 percent capital cushion, as long as these bonds were rated AA or AAA or were issued by a government-sponsored enterprise (GSE), such as Fannie or Freddie. Thus, where a well-capitalized commercial bank needed to devote $10 of capital to $100 worth of commercial loans or corporate bonds, or $5 to $100 worth of mortgages, it needed to spend only $2 of capital on a mortgage-backed security (MBS) worth $100. A bank interested in reducing its capital cushion — also known as "leveraging up" — would gain a 60 percent benefit from trading its mortgages for MBSs and an 80 percent benefit for trading its commercial loans and corporate securities for MBSs.

Astute readers will smell a connection between the Recourse Rule and the financial crisis. By 2008 approximately 81 percent of all the rated MBSs held by American commercial banks were rated AAA, and 93 percent of all the MBSs that the banks held were either triple-A rated or were issued by a GSE, thus complying with the Recourse Rule. (Figures for the proportion of double-A bonds are not yet available.) According to the scholars I mentioned earlier, the lesson is clear: the commercial banks loaded up on MBSs because of the extremely favorable treatment that they received under the Recourse Rule, as long as they were issued by a GSE or were rated AA or AAA.

When subprime mortgages began to default in the summer of 2007, however, those high ratings were cast into doubt. A year later, the doubts turned into a panic. Federally mandated mark-to-market accounting — the requirement that assets be valued at the price for which they could be sold right now — translated temporary market sentiment into actual numbers on a bank's balance sheet, so when the market for MBSs dried up, Lehman Brothers went bankrupt — on paper. Mark-to-market accounting applied to commercial banks too. And it was the commercial banks' worry about their own and their counterparties' solvency, due to their MBS holdings, that caused the lending freeze and, thus, the Great Recession.

What about the rest of the world? The Recourse Rule did not apply to countries other than the United States, but Basel I included provisions for even more profitable forms of "capital arbitrage" through off-balance-sheet entities such as structured investment vehicles, which were heavily used in Europe. Then, in 2006, Basel II began to be implemented outside the United States. It took the Recourse Rule's approach, encouraging foreign banks to stock up on GSE-issued or highly rated MBSs.

THE PERFECT STORM?

Given the large number of contributory factors — the Fed's low interest rates, the Community Reinvestment Act, Fannie and Freddie's actions, Basel I, the Recourse Rule, and Basel II — it has been said that the financial crisis was a perfect storm of regulatory error. But the factors I have just named do not even begin to complete the list. First, Peter Wallison has noted the prevalence of "no-recourse" laws in many states, which relieved mortgagors of financial liability if they simply walked away from a house on which they defaulted. This reassured people in financial straits that they could take on a possibly unaffordable mortgage with virtually no risk. Second, Richard Rahn has pointed out that the tax code discourages partnerships in banking (and other industries). Partnerships encourage prudence because each partner has a lot at stake if the firm goes under. Rahn's point has wider implications, for scholars such as Amar Bhidé and Jonathan Macey have underscored aspects of tax and securities law that encourage publicly held corporations such as commercial banks — as opposed to partnerships or other privately held companies — to encourage their employees to generate the short-term profits adored by equities investors. One way to generate short-term profits is to buy into an asset bubble. Third, the Basel Accords treat monies set aside against unexpected loan losses as part of banks' "Tier 2" capital, which is capped in relation to "Tier 1" capital — equity capital raised by selling shares of stock. But Bert Ely has shown in the Cato Journal that the tax code makes equity capital unnecessarily expensive. Thus banks are doubly discouraged from maintaining the capital cushion that the Basel Accords are trying to make them maintain. This litany is not exhaustive. It is meant

only to convey the welter of regulations that have grown up across different parts of the economy in such immense profusion that nobody can possibly predict how they will interact with each other. We are, all of us, ignorant of the vast bulk of what the government is doing for us, and what those actions might be doing to us. That is the best explanation for how this perfect regulatory storm happened, and for why it might well happen again.

By steering banks' leverage into mortgage-backed securities, Basel I, the Recourse Rule, and Basel II encouraged banks to overinvest in housing at a time when an unprecedented nationwide housing bubble was getting underway, due in part to the Recourse Rule itself — which took effect on January 1, 2002: not coincidentally, just at the start of the housing boom. The Rule created a huge artificial demand for mortgage-backed bonds, each of which required thousands of mortgages as collateral. Commercial banks duly met this demand by lowering their lending standards. When many of the same banks traded their mortgages for mortgage-backed bonds to gain "capital relief," they thought they were offloading the riskiest mortgages by buying only triple-A-rated slices of the resulting mortgage pools. The bankers appear to have been ignorant of yet another obscure regulation: a 1975 amendment to the SEC's Net Capital Rule, which turned the three existing rating companies — S&P, Moody's, and Fitch — into a legally protected oligopoly. The bankers' ignorance is suggested by e-mails unearthed during the recent trial of Ralph Cioffi and Matthew Tannin, who ran the two Bear Stearns hedge funds that invested heavily in highly rated subprime mortgage-backed bonds. The e-mails show that Tannin was a true believer in the soundness of those ratings; he and his partner were exonerated by the jury on the grounds that the two men were as surprised by the catastrophe as everyone else was. Like everyone else, they trusted S&P, Moody's, and Fitch. But as we would expect of corporations shielded from market competition, these three "rating agencies" had gotten sloppy. Moody's did not update its model of the residential mortgage market after 2002, when the boom was barely underway. And Moody's model, like those of its "competitors," determined how large they could make the AA and AAA slices of mortgage-backed securities.

THE REGULATORS' IGNORANCE OF THE REGULATIONS

The regulators seem to have been as ignorant of the implications of the relevant regulations as the bankers were. The SEC trusted the three rating agencies to continue their reliable performance even after its own 1975 ruling protected them from the market competition that had made their ratings reliable. Nearly everyone, from Alan Greenspan and Ben Bernanke on down, seemed to be ignorant of the various regulations that were pumping up house prices and pushing down lending standards. And the FDIC, the Fed, the Comptroller of the Currency, and the Office of Thrift Supervision, in promulgating one of those regulations, trusted the three rating companies when they decided that these companies' AA and AAA ratings would be the basis of the immense capital relief that the Recourse Rule conferred on investment-bank-issued mortgage-backed securities. Did the four regulatory bodies that issued the Recourse Rule know that the rating agencies on which they were placing such heavy reliance were an SEC-created oligopoly, with all that this implies? If you read the Recourse Rule, you will find that the answer is no. Like the Bank for International Settlements (BIS), which later studied whether to extend this American innovation to the rest of the world in the form of Basel II (which it did, in 2006), the Recourse Rule wrongly says that the rating agencies are subject to "market discipline."

Those who play the blame game can find plenty of targets here: the bankers and the regulators were equally clueless. But should anyone be blamed for not recognizing the implications of regulations that they don't even know exist?

Omniscience cannot be expected of human beings. One really would have had to be a god to master the millions of pages in the Federal Register — not to mention the pages of the Register's state, local, and now international counterparts — so one could pick out the specific group of regulations, issued in different fields over the course of decades, that would end up conspiring to create the greatest banking crisis since the Great Depression. This storm may have been perfect, therefore, but it may not prove to be rare. New regulations are bound to interact unexpectedly with old ones if the regulators, being human, are ignorant of the old ones and of their effects.

This is already happening. The SEC's response to the crisis has not been to repeal its 1975 regulation, but to promise closer regulation of the rating agencies. And instead of repealing Basel I or Basel II, the BIS is busily working on Basel III, which will even more finely tune capital requirements and, of course, increase capital cushions. Yet despite the barriers to equity capital and loan-loss reserves created by the conjunction of the IRS and the Basel Accords, the aggregate capital cushion of all American banks at the start of 2008 stood at 13 percent — one-third higher than the American minimum, which in turn was one-fifth higher than the Basel minimum. Contrary to the regulators' assumption that bankers need regulators to protect them from their own recklessness, the financial crisis was not caused by too much bank leverage but by the form it took: mortgage-backed securities. And that was the direct result of the fine tuning done by the Recourse Rule and Basel II.

HOW DID WE GET INTO THIS MESS?

The financial crisis was a convulsion in the corpulent body of social democracy. "Social democracy" is the modern mandate that government solve social problems as they arise. Its body is the mass of laws that grow up over time — seemingly in inverse proportion to the ability of its brain to comprehend the causes of the underlying problems.

When voters demand "action," and when legislators and regulators provide it, they are all naturally proceeding according to some theory of the cause of the problem they are trying to solve. If their theories are mistaken, the regulations may produce unintended consequences that, later on, in principle, could be recognized as mistakes and rectified. In practice, however, regulations are rarely repealed. Whatever made a mistaken regulation seem sensible to begin with will probably blind people to its unintended effects later on. Thus future regulators will tend to assume that the problem with which they are grappling is a new "excess of capitalism," not an unintended consequence of an old mistake in the regulation of capitalism.

Take bank-capital regulations. The theory was (and remains) that without them, bankers protected by deposit insurance would make wild, speculative investments. So deposit insurance begat bank-capital regulations. Initially these were blunderbuss rules that required banks to spend the same levels of capital on all their investments and loans, regardless of risk. In 1988 the Basel Accords took a more discriminating approach, distinguishing among different categories of asset according to their riskiness — riskiness as perceived by the regulators. The American regulators decided in 2001 that mortgage-backed bonds were among the least risky assets, so they required much lower levels of capital for these securities than for every alternative investment but Treasury's. And in 2006, Basel II applied that erroneous judgment to the capital regulations governing most of the rest of the world's banks. The whole sequence leading to the financial crisis began, in 1933, with deposit insurance. But was deposit insurance really necessary?

The theory behind deposit insurance was (and remains) that banking is inherently prone to bank runs, which had been common in 19th-century America and had swept the country at the start of the Depression.

But that theory is wrong, according to such economic historians as Kevin Dowd, George Selgin, and Kurt Schuler, who argue that bank panics were almost uniquely American events (there were none in Canada during the Depression — and Canada didn't have deposit insurance until 1967). According to these scholars, bank runs were caused by 19th-century regulations that impeded branch banking and bank "clearinghouses." Thus, deposit insurance, hence capital minima, hence the Basel rules, might all have been a mistake founded on the New Deal legislators' and regulators' ignorance of the fact that panics like the ones that had just gripped America were the unintended effects of previous regulations.

What I am calling social democracy is, in its form, very different from socialism. Under social democracy, laws and regulations are issued piecemeal, as flexible responses to the side effects of progress — social and economic problems — as they arise, one by one. (Thus the official name: progressivism.) The case-by-case approach is supposed to be the height of pragmatism. But in substance, there is a striking similarity between social democracy and the most utopian socialism. Whether through piecemeal regulation or central planning, both systems share the conceit that modern societies are so legible that the causes of their problems yield easily to inspection. Social democracy rests on the premise that when something goes wrong, somebody — whether the voter, the legislator, or the specialist regulator — will know what to do about it. This is less ambitious than the premise that central planners will know what to do about everything all at once, but it is no different in principle.

This premise would be questionable enough even if we started with a blank legal slate. But we don't. And there is no conceivable way that we, the people — or our agents in government — can know how to solve the problems of modern societies when our efforts have, in fact, been preceded by generations of previous efforts that have littered the ground with a tangle of rules so thick that we can't possibly know what they all say, let alone how they might interact to create another perfect storm.

This article originally appeared in the January/February 2010 edition of Cato Policy Report.

Michigan’s Blueprint for AmericaBehold the cratering of an economy, courtesy of one governor’s Obamaesque policies,

Detroit — Most Americans are just getting warmed up to the idea of a self-centered chief executive who has divined America’s future as a green economy and is brashly installing the industrial-policy tools to get us there. But we here in Michigan have been living it since Gov. Jennifer Granholm took office in 2003.

On Wednesday night, the flashy second-term governor celebrated the “change” she’s brought to Michigan in her final State of the State address. Read it and weep.

Granholm entered office on the tired heels of a three-term Republican with a wave of good tidings as the state’s first female governor. Beautiful, silver-tongued, and Harvard Law–educated, Granholm was a young pol with little executive seasoning. Supremely self-confident despite her inexperience, Granholm raised income taxes (as the state’s economy literally and figuratively headed south), “invested” billions of stimulus dollars in infrastructure that she predicted would create tens of thousands of jobs, mandated renewable-power standards, and backed them up with millions in government subsidies to transform Michigan from “the Rust Belt to the Green Belt.” In her 2006 State of the State address, she promised that “in five years, you’ll be blown away.”

Four years in and it’s blowing hard, all right. Michigan’s unemployment rate has more than doubled, to over 14 percent. Yes, the state’s per capita income drop from 20th in the nation to 40th has tracked a historic restructuring of the state’s auto industry, but Granholm’s Obamaesque policy prescriptions have been anti-growth while fueling budget deficits to record highs.

In her speech Wednesday, the governor declared herself a visionary. “The contours of the new Michigan economy are . . . taking shape in communities across our state,” she said before a legislature that her partisan tactics have hopelessly divided. The government shut down in 2007 and came to the brink again in 2009.

Granholm dismisses the thought that Michigan might be responsible for its own plight through onerous taxation or stubborn unions. She sees Michigan as a victim — of trade policies and greedy corporations taking jobs to Mexico — and her government as its savior. Government, she emphasized, is the mother of job creation. Not once (as has been her seven-year pattern) did she propose a fundamental fix to Michigan’s antiquated tax laws, union culture, or government programs. Instead, she focused on all the jobs she — me, me, me — had brought to the state:

A new electronics plant (that “my nine overseas jobs missions have brought” because “I was able to close the deal”) in Battle Creek, bought with government incentives.

A solar manufacturing facility in Saginaw, the result of a federal Department of Energy loan.

Wind-turbine production by Dowding Machining in Easton Rapids, bought with $7 million in federal stimulus funding.

And so on.

Granholm has presided over the cratering of a state economy. Michigan has led the nation in unemployment for 46 straight months.

She claims that she has “laid the foundation for Michigan’s new economy, steadily building each of six new sectors.” But God help you if you are not on the governor’s select list of favorites; the rest of the job-creating community has had to shoulder a new surcharge on top of the already onerous Michigan Business Tax. Her 2007 tax surcharge, according to the West Michigan Chamber Coalition, hiked taxes for 60 percent of Michigan businesses (most of them small companies), with tax bills doubling for 10 percent of them.

“Our legislators are busy voting on tax credits to a myriad of targeted industries, hoping that one of these ‘new-economy’ firms will save our state from collapse,” protests Bill Jackson of the Grand Rapids Chamber of Commerce. “Isn’t it time government puts an end to picking winners and losers and gives every Michigan job provider a ‘tax credit’?”

Her 2007 budget also increased the income-tax burden by 17 percent. Yet she has resisted reforming the public-employee pensions and health benefits that are bankrupting that state government and that are among the most generous in the country.

To massage her party pals, Granholm will punish even her favored sectors. Biotech is on her list, yet her budget seeks to repeal the state’s immunity from civil lawsuits for drug companies whose products are approved by the FDA. The law, passed in 1996, was specifically intended to give Michigan a comparative advantage and attract high-tech pharmaceutical jobs. This is precisely the kind of economic diversification Granholm claims she supports — yet she throws it overboard as a direct sop to Democrat-friendly trial lawyers.

In the new Michigan, perpetual public stimulus in the form of government-directed industrial policy means non-stop headlines for the chief executive as she picks winners and losers for “new jobs.” Redirecting commerce through the capital, the governor’s power profile grows even as the broader business climate chokes.

Greece as Political Time BombFriday, February 12, 2010, 11:11 AMDavid P. GoldmanAlthough Greece is an EC member, its finances and political system have the character of a banana republic. EC membership, though, enabled Greece to borrow far more money than any banana republic, such that the country’s debt-to-GDP ratio is about triple that of Argentina just before the latter’s bankruptcy in 2000. And because Greece is an EC member, the size and adumbrations of a bankruptcy would be much, much larger than that of any Latin American country.

Earlier I had assumed that we were watching a negotiation: Brussels would shout “Never!,” the Greeks would throw tantrums, and eventually some compromise would be reached and the situation would be stabilized.

Closer examination of the political situation in Greece makes me less optimistic. Greece may be suffering from an inoperable cancer, in the form of a degree of corruption that make a resolution without bankruptcy very difficult to implement.Here are some comments by a political observe in Athens who has written to me privately:

Corruption in Greece has been systematically cultivated by all governments and parties. Everyone has relatives living off the public sector in cushy, do-nothing jobs. They get paid through various funding sources that successive governments have created so even though the nominal wage is low the actual take home and all benefits are quite high. Another important dimension to the public participation in corruption is that the rich by and large do not pay any taxes. The only people who pay are those who can’t escape the clutches of the state: pensioners and civil servants i.e., sectors where the salaries can be accounted for. According to the President of the National Bank of Greece, 30% of the budget of the last administration was unaccounted for—yes, just disappeared into the coffers of their families and well-wishers, and I would guess the other 70% was never audited.

The common psychological traits of the corruption are what the ancients called alazoneia (brash presumption of knowledge by the ignorant) and anaischuntia (shamelessness). All public institutions have one purpose: Suck money from the EU (or via loans) and redistribute it through an inverted pyramid of chicanery with the the loaf going to the top, the crumbs to the bottom. Most people in their little niches of decay are “expert” at this. They “know” the ropes. As the country psychologically devolves there are no lines demarcating the “good from the “bad”, “responsibility” from irresponsibility”. No one ever goes to jail; no one gets punished.

The Europeans know the state of affairs in the country (which they contributed to for a variety of reasons). They know that no Greek government can implement reforms through a political process of consensus. The people are waiting for their doles; the students are waiting for their payback (cushy jobs somewhere), the unions, the coops are all poised to demand their due from the machines that serve them. Meanwhile the rich are sending money out of the country (Switzerland and Cyprus) in the billions out of fear that the government may have no recourse but to grab part of their accounts in the future.

Hence it seems to me that the only game in town is to put Greece under complete receivership with all orders coming from abroad for fiscal cutbacks and the like. Since the EU has no machinery for doing this and the Greek government could never have a consensus for such a program, these measures will be accomplished through fear. Greeks will be left dangling at the mercy of speculators and others, yet at the same time tacitly supported, so that with each assault the Greek government will be implementing (in a climate of panic and fear) some new unpopular measure to mollify the rating agencies and bondholders. The Greeks have not yet woken up to this new reality. They still think EU is Santa Claus or that someone will bail them out (maybe the Chinese!). The lollipops are being taken away and whatever sweets are left will probably go to prop up the banks.

There are two ways in which this scenario may fail: (1) the growing resentment of the German public especially and their unwillingness to bail out Greece. This raises the possibility that at some critical point the EU (due to populist outrage) may not be able to act decisively to stave off a run on the Greek banks. (2) Slide into anarchy in Greece itself. There is always the possibility that the combustible parts of the corrupt machinery start to ignite patches of fires here and there with hard-to-predict possibilities for touching off more general conflagrations.

For now the scenario is working. But nothing really has yet happened in the country. For the man on the street all of this talk about austerity is still just future legislation, measures in the pipeline, at worst manageable cutbacks that reflect the government’s rosy projections.

If all goes according to plan Greece will be ruled by the bankers from abroad with successive waves of crises leading to new cutback-measures and “reforms”. The road will be bumpy and the ride dangerous but manageable. But one should not discount the possibility that psychological despair and irrationality (fueled with desires to live the good life on a dole) may not spark suicidal actions along the way. Keep in mind that the youth have been completely alienated (corrupted and ‘consumerized’ by their parents) and their despair adds another factor of instability.

The country is sliding into psychological despair within a cocoon of unrequited desires that have been inflamed and legitimized over the years. Anger is rampant. Yesterday on the bus a student gave his ticket to a lady, telling her that she should use his ticket because he was getting off. Someone called out that this was shameful “thievery” to which the youngster responded: “I am stealing 50 cents but the government and the banks have stolen 50 billion!” Many nodded in approval.

Prime Minister Papandreou was on television last night, white as a ghost. He was telling the Greek press that he was thankful that the IMF was “offering” their technical expertise (technognosia) to Greece. Yes money is not coming, but how sweet of the IMF to be sending its experts to dictate terms over the next few weeks. It seems that someone in Europe gave him the unexpected news that the party is over. This reality has not yet even remotely begun to set in here. The media are giving the message that “the Europeans can’t afford to let Greece go under….that Europe stands to lose too much….that Merkel and those stuffy Northerners will have to come to Greece’s aid.”

When the reality does start seeping in—hold on to your hats….

One of the delusions is that there is a moral kernel in the country that we can turn to for consolation and renewal. There is no such thing. The corruption went too deep. The country is completely unprotected on the cultural and moral front. This too has not seeped in. And yet when people become desperate; when their world starts to crumble around them and all their delusions about themselves and their good life not only collapse, but do so without any legacy to fall back on and no dream to look forward to, then beware. We are in unchartered territory where Furies and Ate pilot the ship.

It began in Athens. It is spreading to Lisbon and Madrid. But it would be a grave mistake to assume that the sovereign debt crisis that is unfolding will remain confined to the weaker eurozone economies. For this is more than just a Mediterranean problem with a farmyard acronym . It is a fiscal crisis of the western world. Its ramifications are far more profound than most investors currently appreciate.

There is of course a distinctive feature to the eurozone crisis. Because of the way the European Monetary Union was designed, there is in fact no mechanism for a bail-out of the Greek government by the European Union, other member states or the European Central Bank (articles 123 and 125 of the Lisbon treaty). True, Article 122 may be invoked by the European Council to assist a member state that is "seriously threatened with severe difficulties caused by natural disasters or exceptional occurrences beyond its control", but at this point nobody wants to pretend that Greece's yawning deficit was an act of God. Nor is there a way for Greece to devalue its currency, as it would have done in the pre-EMU days of the drachma. There is not even a mechanism for Greece to leave the eurozone.

That leaves just three possibilities: one of the most excruciating fiscal squeezes in modern European history - reducing the deficit from 13 per cent to 3 per cent of gross domestic product within just three years; outright default on all or part of the Greek government's debt; or (most likely, as signalled by German officials yesterday) some kind of bail-out led by Berlin . Because none of these options is very appealing, and because any decision about Greece will have implications for Portugal, Spain and possibly others, it may take much horsetrading before one can be reached.

Yet the idiosyncrasies of the eurozone should not distract us from the general nature of the fiscal crisis that is now afflicting most western economies. Call it the fractal geometry of debt: the problem is essentially the same from Iceland to Ireland to Britain to the US. It just comes in widely differing sizes.

What we in the western world are about to learn is that there is no such thing as a Keynesian free lunch. Deficits did not "save" us half so much as monetary policy - zero interest rates plus quantitative easing - did. First, the impact of government spending (the hallowed "multiplier") has been much less than the proponents of stimulus hoped. Second, there is a good deal of "leakage" from open economies in a globalised world. Last, crucially, explosions of public debt incur bills that fall due much sooner than we expect

For the world's biggest economy, the US, the day of reckoning still seems reassuringly remote. The worse things get in the eurozone, the more the US dollar rallies as nervous investors park their cash in the "safe haven" of American government debt. This effect may persist for some months, just as the dollar and Treasuries rallied in the depths of the banking panic in late 2008.

Yet even a casual look at the fiscal position of the federal government (not to mention the states) makes a nonsense of the phrase "safe haven". US government debt is a safe haven the way Pearl Harbor was a safe haven in 1941.Even according to the White House's new budget projections, the gross federal debt in public hands will exceed 100 per cent of GDP in just two years' time. This year, like last year, the federal deficit will be around 10 per cent of GDP. The long-run projections of the Congressional Budget Office suggest that the US will never again run a balanced budget. That's right, never.

The International Monetary Fund recently published estimates of the fiscal adjustments developed economies would need to make to restore fiscal stability over the decade ahead. Worst were Japan and the UK (a fiscal tightening of 13 per cent of GDP). Then came Ireland, Spain and Greece (9 per cent). And in sixth place? Step forward America, which would need to tighten fiscal policy by 8.8 per cent of GDP to satisfy the IMF.

Explosions of public debt hurt economies in the following way, as numerous empirical studies have shown. By raising fears of default and/or currency depreciation ahead of actual inflation, they push up real interest rates. Higher real rates, in turn, act as drag on growth, especially when the private sector is also heavily indebted - as is the case in most western economies, not least the US.

Although the US household savings rate has risen since the Great Recession began, it has not risen enough to absorb a trillion dollars of net Treasury issuance a year. Only two things have thus far stood between the US and higher bond yields: purchases of Treasuries (and mortgage-backed securities, which many sellers essentially swapped for Treasuries) by the Federal Reserve and reserve accumulation by the Chinese monetary authorities.

But now the Fed is phasing out such purchases and is expected to wind up quantitative easing. Meanwhile, the Chinese have sharply reduced their purchases of Treasuries from around 47 per cent of new issuance in 2006 to 20 per cent in 2008 to an estimated 5 per cent last year. Small wonder Morgan Stanley assumes that 10-year yields will rise from around 3.5 per cent to 5.5 per cent this year. On a gross federal debt fast approaching $1,500bn, that implies up to $300bn of extra interest payments - and you get up there pretty quickly with the average maturity of the debt now below 50 months.

The Obama administration's new budget blithely assumes real GDP growth of 3.6 per cent over the next five years, with inflation averaging 1.4 per cent. But with rising real rates, growth might well be lower. Under those circumstances, interest payments could soar as a share of federal revenue - from a tenth to a fifth to a quarter.

Last week Moody's Investors Service warned that the triple A credit rating of the US should not be taken for granted. That warning recalls Larry Summers' killer question (posed before he returned to government): "How long can the world's biggest borrower remain the world's biggest power?"

On reflection, it is appropriate that the fiscal crisis of the west has begun in Greece, the birthplace of western civilization. Soon it will cross the channel to Britain. But the key question is when that crisis will reach the last bastion of western power, on the other side of the Atlantic.The writer is a contributing editor of the FT and author of The Ascent of Money: A Financial History of the World

STEVE FORBES, Forbes.com "Fact and Comment" (02/25/10): Debt-plaguedGreece dominates the headlines, along with such other troubled countriesas Portugal, Italy and Spain. Here at home several states--led byprofligate California--and numerous municipalities are also teetering onthe edge of insolvency. In all of these cases the problem is excessivespending. True, revenues are down because of the recession, and marketsare skittish about financing suspect debtors, in part because of the lackof transparency concerning these borrowers' using possibly explosivederivatives to paper over budget shortfalls. But ever more obese budgetshave put many governments on the brink of bankruptcy.

Disaster, however, is not inevitable: A bracing and, indeed, inspiringexample of what must be done is rising in New Jersey. Newly mintedRepublican Governor Chris Christie, facing a fiscal disaster, is doing theunthinkable: slashing spending and pushing for tax cuts as a way to reviveNew Jersey's moribund economy.

Last month Christie told the Democrat-dominated legislature that he wasimpounding more than $2 billion of this year's budget. The scythe iswide-sweeping. "I am cutting spending in 375 different state programs,from every corner of state government. I will use my executive authorityto implement [these cuts] now. [They] will eliminate our $2 billion budgetgap," Christie asserted to stunned lawmakers. His cuts are even biggerthan they sound. "Upon arrival my administration had $6 billion ofbalances from which to find $2 billion of savings. We had to cut one-thirdof our available funds with only four and a half months to go in thefiscal year."

While the reductions are huge, Christie was careful to use the scalpel,not the meat axe. In education, for example, he does not take "one pennyfrom an approved school instructional budget. Not one dime out of theclassroom. Not one textbook left unbought. Not one teacher laid off. Notone child's education compromised for one minute. Not one dollar of newproperty taxes will be needed."

But the governor made it clear that ever more drastic surgery is needed innext year's budget, which he will submit this month. The howls will thenbe truly deafening.

School budgets will be hit hard as state aid is cut. But this diresituation will finally force school districts--under the ever morewatchful eyes of tax-strapped parents--to cut bureaucratic bloat.New Jersey's 566 cities and municipalities will also urgently do what theyshould have done years ago--consolidate services across municipal lines.

The biggest push will be on pensions. "Pensions and benefits are the majordrivers of our spending increases at all levels of government--state,county, municipal and school board," the governor declared. "The specialinterests have already begun to scream their favorite word--which,coincidentally, is my 9-year-old son's favorite word when we are makinghim do something he knows is right but does not want to do--'unfair.' Onestate retiree, 49 years old, paid, over the course of his entire career, atotal of $124,000 toward his retirement pension and health benefits. Whatwill we pay him? $3.3 million in pension payments over his life and nearly$500,000 for health care benefits--a total of $3.8 million on a $120,000investment. Is that fair?

"A retired teacher paid $62,000 toward her pension and nothing, yesnothing, for full family medical, dental and vision coverage over herentire career. What will we pay her? $1.4 million in pension benefits andanother $215,000 in health care benefit premiums over her lifetime. Is it'fair' for all of us and our children to have to pay for this excess...?

While Barack Obama was making his latest pitch for a brand-new, even-more-unsustainable entitlement at the health-care “summit,” thousands of Greeks took to the streets to riot. An enterprising cable network might have shown the two scenes on a continuous split-screen — because they’re part of the same story. It’s just that Greece is a little further along in the plot: They’re at the point where the canoe is about to plunge over the falls. America is farther upstream and can still pull for shore, but has decided instead that what it needs to do is catch up with the Greek canoe. Chapter One (the introduction of unsustainable entitlements) leads eventually to Chapter Twenty (total societal collapse): The Greeks are at Chapter Seventeen or Eighteen.

What’s happening in the developed world today isn’t so very hard to understand: The 20th-century Bismarckian welfare state has run out of people to stick it to. In America, the feckless, insatiable boobs in Washington, Sacramento, Albany, and elsewhere are screwing over our kids and grandkids. In Europe, they’ve reached the next stage in social-democratic evolution: There are no kids or grandkids to screw over. The United States has a fertility rate of around 2.1 — or just over two kids per couple. Greece has a fertility rate of about 1.3: Ten grandparents have six kids have four grandkids — ie, the family tree is upside down. Demographers call 1.3 “lowest-low” fertility — the point from which no society has ever recovered. And, compared to Spain and Italy, Greece has the least worst fertility rate in Mediterranean Europe.

So you can’t borrow against the future because, in the most basic sense, you don’t have one. Greeks in the public sector retire at 58, which sounds great. But, when ten grandparents have four grandchildren, who pays for you to spend the last third of your adult life loafing around?

By the way, you don’t have to go to Greece to experience Greek-style retirement: The Athenian “public service” of California has been metaphorically face down in the ouzo for a generation. Still, America as a whole is not yet Greece. A couple of years ago, when I wrote my book America Alone, I put the then–Social Security debate in a bit of perspective: On 2005 figures, projected public-pensions liabilities were expected to rise by 2040 to about 6.8 percent of GDP. In Greece, the figure was 25 percent: in other words, head for the hills, Armageddon outta here, The End. Since then, the situation has worsened in both countries. And really the comparison is academic: Whereas America still has a choice, Greece isn’t going to have a 2040 — not without a massive shot of Reality Juice.

Is that likely to happen? At such moments, I like to modify Gerald Ford. When seeking to ingratiate himself with conservative audiences, President Ford liked to say: “A government big enough to give you everything you want is big enough to take away everything you have.” Which is true enough. But there’s an intermediate stage: A government big enough to give you everything you want isn’t big enough to get you to give any of it back. That’s the point Greece is at. Its socialist government has been forced into supporting a package of austerity measures. The Greek people’s response is: Nuts to that. Public-sector workers have succeeded in redefining time itself: Every year, they receive 14 monthly payments. You do the math. And for about seven months’ work: For many of them, the work day ends at 2:30 p.m. And, when they retire, they get 14 monthly pension payments. In other words: Economic reality is not my problem. I want my benefits. And, if it bankrupts the entire state a generation from now, who cares as long as they keep the checks coming until I croak?

We hard-hearted small-government guys are often damned as selfish types who care nothing for the general welfare. But, as the Greek protests make plain, nothing makes an individual more selfish than the socially equitable communitarianism of big government: Once a chap’s enjoying the fruits of government health care, government-paid vacation, government-funded early retirement, and all the rest, he couldn’t give a hoot about the general societal interest; he’s got his, and to hell with everyone else. People’s sense of entitlement endures long after the entitlement has ceased to make sense.

The perfect spokesman for the entitlement mentality is the deputy prime minister of Greece. The European Union has concluded that the Greek government’s austerity measures are insufficient and, as a condition of bailout, has demanded something more robust. Greece is no longer a sovereign state: It’s General Motors, and the EU is Washington, and the Greek electorate is happy to play the part of the UAW — everything’s on the table except anything that would actually make a difference. In practice, because Spain, Portugal, Italy, and Ireland are also on the brink of the abyss, a “European” bailout will be paid for by Germany. So the aforementioned Greek deputy prime minister, Theodoros Pangalos, has denounced the conditions of the EU deal on the grounds that the Germans stole all the bullion from the Bank of Greece during the Second World War. Welfare always breeds contempt, in nations as much as inner-city housing projects: How dare you tell us how to live! Just give us your money and push off.

Unfortunately, Germany is no longer an economic powerhouse. As Angela Merkel pointed out a year ago, for Germany, an Obama-sized stimulus was out of the question simply because its foreign creditors know there are not enough young Germans around ever to repay it. Over 30 percent of German women are childless; among German university graduates, it’s over 40 percent. And for the ever-dwindling band of young Germans who make it out of the maternity ward, there’s precious little reason to stick around. Why be the last handsome blond lederhosen-clad Aryan lad working the late shift at the beer garden in order to prop up singlehandedly entire retirement homes? And that’s before the EU decides to add the Greeks to your burdens. Germans, who retire at 67, are now expected to sustain the unsustainable 14 monthly payments per year of Greeks who retire at 58.

Think of Greece as California: Every year an irresponsible and corrupt bureaucracy awards itself higher pay and better benefits paid for by an ever-shrinking wealth-generating class. And think of Germany as one of the less profligate, still-just-about-functioning corners of America such as my own state of New Hampshire: Responsibility doesn’t pay. You’ll wind up bailing out anyway. The problem is there are never enough of “the rich” to fund the entitlement state, because in the end it disincentivizes everything from wealth creation to self-reliance to the basic survival instinct, as represented by the fertility rate. In Greece, they’ve run out Greeks, so they’ll stick it to the Germans, like French farmers do. In Germany, the Germans have only been able to afford to subsidize French farming because they stick their defense tab to the Americans. And in America, Obama, Pelosi, and Reid are saying we need to paddle faster to catch up with the Greeks and Germans. What could go wrong?

— Mark Steyn, a National Review columnist, is author of America Alone.

Greek police clashed with demonstrators protesting sweeping budget cuts Friday as the government sought support from Germany to help it avoid default, only to be told not to expect a single cent. Police fired tear gas after a union leader was struck and hurt by youths, an AFP reporter on the scene said, during protests against sweeping new budget and spending cuts announced Wednesday.

The violence erupted as Greek Prime Minister George Papandreou was to meet German Chancellor Angela Merkel later Friday, with Germany critical to any eurozone effort to help Greece restore its market credibility and already signalling it was not prepared to offer financial assistance.

Papandreou told Germany's Frankfurter Allgemeine newspaper he was "not asking for money" but other forms of support.

Greek aid "unnecessary"

"We need support from the European Union and our partners to obtain credit on the markets at better conditions. If we do not receive this aid, we will not be able to enact the changes we foresee."

But speaking ahead of the Merkel-Papandreou talks, Germany's Economy Minister Rainer Bruederle said Berlin would not provide Greece with "one cent."

"Papandreou said that he didn't want one cent -- in any case the German government will not give one cent," Bruederle told reporters.

Luxembourg's Jean-Claude Juncker, who acts as the formal head in finance matters for the 16 nations that share euro, said he believed the Greek measures meant that Athens would not now need EU aid.

Greeks, Germans meet over finanical crisis

"The commitments taken by the Greek government are clearly paving the way towards an exit" from its debt and deficit crisis, Juncker said.

Juncker reiterated the agreed line among European Union leaders that they "stand ready to take coordinated and determined action if necessary (but) ... I don't think this action will be needed."

Europe's biggest economy, Germany is widely seen as the most likely candidate to help prevent a Greek default, which would be disastrous for the 16-nation eurozone.

But there is huge opposition in Germany against such a move, with angry editorials slamming alleged Greek corruption and wasteful spending and Merkel allies even suggesting Greece should sell some of its islands to free up cash.

There was also anger aplenty on the streets of Athens Friday.

Several thousand Communist protesters demonstrated in front of parliament as it voted on the latest austerity package.

"We say no to anti-popular measures, to taxes and allowance cuts," a Communist banner said.

Greece's two main unions brought traffic to a standstill with a public sector strike. No public transport ran in Athens in the morning, all Greek airports were to close for a four-hour period and giant traffic jams clogged the centre of the capital.

State hospitals ran on skeleton staff, while teachers, state and private media groups were also hit by the strike. Even the police union called on its members to join protests organised for the day.

Addressing parliament, Finance Minister George Papaconstantinou said the state was paying 26 billion euros in civil servant salaries, up 50 percent in the last five years.

"Where did this money go? Each and every minister would give benefits to whomever they wanted," Papaconstantinou said.

The government on Wednesday increased sales, tobacco and alcohol taxes and cut public sector holiday allowances. Pensions were also frozen in a package worth the equivalent of around two percent of gross domestic product (GDP).

Athens has promised the European Union that it will reduce its public deficit this year by four percentage points from 12.7 percent.

Merkel has welcomed the Greek package as "an important step" towards cutting its budget deficit and restoring trust in Athens and the euro.